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I have read and heard a currency will lose value if growth slows or reverses in a country.

Lets take GBP, does anyone know why/what is the reason in detail (economic perspective) the GBP would lose value against other currencies if growth was to slow, however the interest rate was still competitive?

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The "fiat" that determines what a currency is worth is based on the traders perception as to the likely returns if that currency is bought.

IR differentials have driven the pound to its current heights and the perception that sterling is backed by a miraculous economy that shows no signs of going into reverse. Up to now HPI has been resilient and IR have held up as there have been no signs of a crash if VI reports are to be believed--and what else do the traders have to go on? If a crash looks like its about to occur IR will tumble (August 2005 is a case in point) and with it the value of the currency. IN a sense it is true to say that as goes HPI so goes the pound.

If the current perception that sterling is backed by a true miracle economy changes and returns do not outweigh the risks the traders will sell sterling.

If a severe recession or even depressioon develops there will be a flight to safety which is usually the US as that economy is huge, diversified and will emerge out of the hole first.

Bottom line: the value of any given currency is based on what is backing it by way of risks to the traders money. IN the coming months the question for traders is who is going down hardest and staying down longest. The answer to that question is who has had the highest level of assett price inflation? Whose house prices have diverged from wages the most?

Edited by Realistbear

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Surely the fundamental driver is the demand for the currency, and that follows things like trade balance, interest rates, and by the status of being a 'reserve currency', rather than simply economic growth.

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I have read and heard a currency will lose value if growth slows or reverses in a country.

Lets take GBP, does anyone know why/what is the reason in detail (economic perspective) the GBP would lose value against other currencies if growth was to slow, however the interest rate was still competitive?

it's all relative.

If growth and earnings potential are faster in another country,then money will flow to where the best returns are,and hence debasing the currency from which the original money was withdrawn.

..irrespective of GDP,there will be some sections of the UK that do well in such an environment.

Safe to say that consumer/retail/housing is not one of them(unless they have got international exposure)

likewise with tech....there is a need for faster stuff to improve productivity here,BUT the real driver in this phase is lower spec produced more cheaply......with a headwind of higher raw material costs,and downward pressure on output prices....not going to give really stellar growth for a good few years yet.

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I have read and heard a currency will lose value if growth slows or reverses in a country.

Lets take GBP, does anyone know why/what is the reason in detail (economic perspective) the GBP would lose value against other currencies if growth was to slow, however the interest rate was still competitive?

But surely it will only loose its value relative to another country's currency, if we have a world recession then what does it matter, wont the currency stay put.

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