Can you Hear the Pound Drop?

This is the first in a regular Bella column on matters economic. The big news this week was the noise of the pound sterling hitting the floor. Crash, bang, wallop! Sterling dropped to its lowest level against both the euro and the dollar in the past year. George Kerevan reports.

The key thing to note is that the foreign exchange markets don’t work on political sentiment but on making money. The pound took a nosedive because the markets have decided a hard Brexit is more likely than not, and that said hard Brexit is bad business.

The other thing to keep in mind is that sterling went south despite the Bank of England having raised the official interest rate above 0.5 per cent for the first time in a decade. Normally you would expect the pound to rise on a rate increase, because foreign investors would get more for their money. The fact the markets ignored the Bank of England suggests they aren’t convinced Theresa May can pull off a deal with the EU at the October summit.

Market traders are simple folk and like round numbers. Currently sterling is trading at around 90 pence to the euro. The feeling is that one pound to one euro is heading our way. That is very bad news if you are taking a European holiday.

There’s a myth that a cheaper pound has a sunny upside because it makes UK exports cheaper and so boosts sales. Reality is a bit more complicated. For starters, UK companies, property and assets are now cheap so expect foreign equity and hedge funds to start hoovering up. If you are a Chinese bank wanting a foothold in the UK high street, RBS is now an even more attractive acquisition. Scotland’s high-tech firms are also prime targets.

Also, to take advantage of cheaper exports you have to have something to sell. The UK’s range of export goods is not that exciting, which helps explain the fact that in the year to March – despite a weak currency – the UK had a current account deficit with the rest of the world of £80bn. That’s £80bn in foreign currency we have to beg, borrow or steal to pay for our imports. Britain normally finances that gap by selling off the family silver – plus acting as a magnet for wholesale global money laundering courtesy of the City of London.

There is an issue here for an independent Scotland. The SNP’s Growth Commission Report, authored in the main by Andrew Wilson (formerly of RBS), recommends that indy Scotland retains the use of sterling for the foreseeable future. That would leave the Scottish economy at the mercy of changes in the sterling foreign exchange rate – which remains volatile due to Brexit.


There’s another element in the exchange rate situation we need to factor in – Trump’s dollar. One reason the pound has gone down is that the almighty buck is climbing like a rocket. Partly this is because the US central bank, the Federal Reserve, has raised interest rates seven times since late 2015. But it is also to do with The Donald. The US economy is booming thanks to Trump borrowing and spending like he wants a second term in the White House. In fact, Trump’s reckless borrowing and spending makes Jeremy Corbyn look like a fiscal conservative.

Now here’s the problem: Trump is financing his borrowing spree through short-term US Treasury loans. That is sucking in cash from around the globe. But in turn this is pushing up short-term interest rates throughout the world. The three-month Libor rate – the benchmark for global borrowing costs – has jumped to 2.3 per cent. It’s early days, but this is the first sign of a new credit crunch coming to a mortgage near you.


The sad bankruptcy of the House of Fraser retail group and its purchase by Sports Direct brings back memories of that great Scottish entrepreneur Sir Hugh Fraser (1936-1987). Sir Hugh succeeded his father, Lord Fraser of Allander, as boss of the then stuffy House of Fraser stores back in 1966. Under Fraser Jr. a modern, zestful retailing empire was created. Eventually, Sir Hugh retired and House of Fraser was acquired (and subsequently ruined) by the Al Fayeds.

The interesting thing is that – almost uniquely for a businessman in the deeply unionist Sixties – Hugh Fraser was a convinced Scottish nationalist. He also funded the creation of the Fraser of Allander Institute at Strathclyde University as the first serious think tank researching the Scottish economy. I expect Sir Hugh is now turning in his grave. Firstly because of the demise of his retail empire. And secondly by the capture of the institute that bears his name by unionist pessimists. This column, on the other hand, is resolutely optimistic.

Comments (22)

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  1. NB says:

    Good topic IMO,
    Two and a half years ago a Euro cost less than 70p.
    Each day the news says “up a bit” “down a bit” but never a summary of how bad it’s got, like “in the last 12 months GBP has fallen off a cliff”.

    Suppose it’s hardly essential for us to be buying property, holidaying or investing overseas but travel helps us integrate, makes for a smaller world etc.
    And I guess the story is what the currency exchange tells us about our economy……that it ain’t great

  2. Josef Ó Luain says:

    Given the near-daily Brexit pantomime and the overall uncertainty surrounding a “Deal”, the 90 cent, Euro to GBP rate is, to my mind, remarkable, as it would seem to bear little-or-no relationship to the indebtedness or general health of the UK economy.

  3. Bill Ramsay says:

    Good Stuff George,
    Guess who’s off to Greece for a week next Tuesday,
    Hey Ho!
    More seriously on the Doom-mungers in the Fraser of Allander,
    At least John McLaren is coming around to the view that the whisky tax proposal,
    first mooted by Biggar Economics in 2013
    and the subject of a half hour BBC documentary by Douglas Fraser later that year,
    including , it should be noted,
    endorsements from Proff John Kay late of Salmond’s Council of Economic Advisers and George Mathewson , Chair of RBS (UNTIL 2000)

    Mabye it could be the subject of one of your future columns , you could start with my article on Commonspace.

  4. Jamsie says:

    “There is a problem here for an independent Scotland”.
    Mibees there are many more problems for Scotland relating to independence.
    Austerity plus anyone?
    For twenty five years?!
    That pesky GCR!
    It does give wee Nicola a fig leaf though when looking to explain why she cannot call a referendum.
    It’s all the fault of the tories as usual.
    For some reason or another they are not keeping her in the loop in Brexit.
    Tut tut.
    If they were she would be able to call one.
    No really!
    But I suppose the biggest problem is the majority of the electorate don’t want it.
    Wee Nicola cannot seem to get her head round this.
    What happened to the Brexit bounce to give her a mandate?
    So the point is rather moot.
    Scotland is not independent and will ride out the storm under the protective comforting wing of the U.K.

    1. Kenny Smith says:

      Blah blah foam, blah blah more foam!!

      1. Jamsie says:

        Och now Barbie.
        People will be thinking you have a wee fetish for me!
        Dolls full of hot air are really not my scene!

        1. Kenny Smith says:

          Blah blah daily mail, blah blah foam.

    2. Graeme Purves says:

      Goodness me! All that energy and rhetorical effort and you end so limply with:

      “…the protective comforting wing of the U.K.”


      1. Jamsie says:

        I actually thought that this was the strongest point of my response.
        Better together and all that!

        1. Graeme Purves says:

          I have seen a more protective wing on a chlorinated chicken.

          1. Jamsie says:

            You should read the GCR and see what austerity plus will look like.
            We are all in relative riches compared to what would come if Indy ever came to pass.
            Fortunately wee Nicola knows it won’t happen but is happy to wind the muppets up from time to time.
            And the face painting starts all over again.
            Gullible does not come near the description.

    3. John Mooney says:

      “It’s all the fault of the tories as usual” at last you have admitted the obvious truth,your Damascus moment ?

      1. Jamsie says:

        Can you tell me anything that is not the fault of the tories?

        1. John Mooney says:


          1. Jamsie says:

            Thought not.
            Police Scotland, CfE, ScotRail, NHS Scotland et al the product of SNP incompetence and dogma.
            Now it seems they want to break the GDPR laws for the named person scheme no one wants.
            Hey ho wee Nicola is starting to appear a lot like Maggie, a woman who knows she will be out shortly and will just inflict the electorate of Scotland with her dogma regardless.
            How spiteful.

  5. w.b.robertson says:

    so the plumetting value of the £ is bad, bad, bad according to this epistle. so the sky-rocketting value of Mr Trump`s dollar must be….what?

    1. Kenny Smith says:

      Finish your sentance please?

    2. mince'n'tatties says:

      George may well be ‘resolutely optimistic’ as claimed, but he leaves me resolutely confused. When speaking at a SNP conference fringe meeting he was roundly applauded for rejecting the Growth Commission’s suggestion that an Indie Scotland should retain the £ for at least ten years.
      His thinking seemed to be along the lines that we would benefit more from adopting the New Zealand and Scandinavian experience of the 1990’s, that of having our
      own currency , which we could devalue to improve productivity, grow the economy and generate prosperity.
      So devaluation has the potential to do good when it suits George’s political philosophy otherwise its bad. We all know the Euro is no more than a devalued mark, so fundamentally I’m not disagreeing with him, but wanting it both ways is George the politician, not the economist, winning through.

      1. mince'n'tatties says:

        Replying to my own post. Sad Sad, I know, but the speed of change is envigourating or scary, take your pick. Turkey and its convulsions , at light speed, have made my mind up, a new Scottish currency is off the table.
        We would have a mirror image of their experience; global lenders demanding that all borrowing [and there would be borrowing] done in one of the big three..£..$…Euros.
        Loans unavailable on the back of the new currency. Not enough historical trust, unless compensated by usurious interest rates.
        And then if there is a spat? Currency collapse…. a devalued Groat, Mel Gibson, Dram.. whatever. But everything repaid in the towering currency of choice.
        It just doesn’t compute.
        There are other perfectly valid reasons for indie, that said the Editors said this was a economic thread, and I’ve kept to the script.
        The unpalatble truth is it’s the £ or the Euro. Time to bite the bullet.

  6. MBC says:

    Scots whiskey, salmon, and oil are exports. Oil may rise further if Trump continues to press Iran.

    1. Jack collatin says:

      ‘Whisky’, MBC.
      It may seem trivial, but very important.
      All other ‘whiskey’ is not, and never will be, Scotch.
      £4 billion in exports…

      1. Alf Baird says:

        £4bn? More like £40bn judging by whisky company profits. And I suppose there must be a good reason that ex FCO folks control the industry via SWA.

        On Fraser of Allander, George, at least they called it right by stating that ‘economic growth will require a substantial increase in exports’, though oddly this is something missed by Wilson’s GC. The key problem of course is that Scotland is rather like an island without a ferry connection to its mainland (The Continent). Industry nowadays needs a daily or better ferry connection, for trade and travel. Expensive road transit through 500 miles of the most congested and rubbish roads in Europe (i.e. England) really does us no favours and helps explain why we don’t export hee haw aside from the whisky and oil.

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