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Weak Sterling Will Deliver Uk Surplus

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Ben Broadbent, the bank’s UK economist, said the 20pc slide in sterling over the past year was “enough to push the UK’s current account into comfortable and permanent surplusâ€. Britain has not had a durable surplus in living memory.

The bank issued an alert yesterday advising clients to build up sterling positions. It said the economy was in better shape than it looked, with public debt likely to peak at under 80pc of GDP — lower than Germany and France.

“The UK data continues to exceed the Bank of England’s projections on the upside. We expect interest rates to rise from next spring,†said the bank’s currency team.

The economy is already expanding at a 2pc annual rate and inflation is proving “sticky†compared with Europe. Goldman expects the pound to strengthen by about 8pc to €0.84 over the next three months. It closed yesterday at €0.9035. This contrasts with warnings from BNP Paribas that sterling is on the cusp of another crash, with euro parity in sight by early next year.

The currency markets have been rattled by the Bank of England’s quarterly bulletin, which suggested that sterling may have suffered long-term damage during the financial crisis. The Treasury estimates that 5pc of the country’s economic base has been permanently lost.

Mr Broadbent said the UK’s public finances were in a “dire state†with a deficit near 13pc this year and next, but the lesson of fiscal retrenchment in the early 1990s was that a weak currency can bring swift recovery in a very open economy. “It would be risky to bet against the same happening again. The foreign exchange markets are discounting a lot,†he said.

Goldman said investors had exaggerated the currency risk faced by UK banks from the credit crunch. They also punished sterling this year because a high share of Britain’s overseas assets are in equities, but this no longer makes sense as global stock markets recover strongly.

The Giant Squid says we are OK, obviously the jobless recovery is going to be very strong in the UK.

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They did so towards the end of last year when the euro came within two pence of this landmark. Are they any more right this time around?

The rationale for expecting the pound to fall is quite clear: the UK has been almost uniquely vulnerable to the financial and economic crisis, with its twin reliance on the housing market and financial sector for a large chunk of GDP. The fiscal position is horrific.

Moreover, the Bank of England has been carrying out quantitative easing, creating money and pumping it directly into the economy, with a relish unmatched by the rest of the Western world.

As a result, the amount of cash banks hold in their reserve accounts in Threadneedle Street has climbed to almost 10pc of gross domestic product, compared with 5pc in the US,

3pc in Europe and just over

3pc in Japan.

Both of these factors could easily be construed as negative for the currency, since they smack of an effort to generate inflation. The sense of sterling bearishness is reinforced by the fact that the UK has been far more sluggish than Germany, France or Japan in its recovery from recession.

Were Britain alone in facing these issues, the fall in sterling would make sense. But it is not. Most economies will emerge from this crisis with debt levels that are higher than they have been since wartime. Most economies are both fighting deflation and attempting to rebalance their economies to make them less dependent on borrowing.

In such circumstances, depreciation is precisely what a country like the UK needs to rebalance and recover. Indeed, as Goldman Sachs economist Ben Broadbent has pointed out, this is exactly what happened in the early 1990s. It seems likely that such a scenario helps explain why the Bank, and its Governor Mervyn King, appear so keen to see sterling drop further. Indeed, there may be an extra push in that direction from today's Bank minutes.

Devaluation may not be comfortable, but it is Britain's secret weapon in times of crisis. Unless this becomes a full-scale exodus of investors, it is far too early to start worrying about the pound.

Devaluation the classic trick to improve exports, just who are we going to be exporting too?

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Devaluation the classic trick to improve exports, just who are we going to be exporting too?

The Eurozone, always our largest export market, and the one with the hugley overvalued currency

Previously it was the UK with the massively overvalued currency (hence all those French/Spanish houses looking so cheap) so they used to export a lot of consumer goods to us

So GS are making sense...

...however doesnt mean sterling cant fall another 10% in the meantime... <_<

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1.10 to the euro seems about right to me so we can have debates about the euro crashing if the pound goes up a few cents or the end of the pound if it drops a few cents but the real picture is how is the pound doing against other basket of currencys (exdcluding the $$$)

we are falling and will be poorer it,s just that some will fall faster then others but in the mean time i feel in no rush to swop my silver or euro's for GBP.

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