Currency drops 8% against the Dollar as 'hard' brexit fears worsen

folarin okunola

October 10, 2016 8:47 AM

Britain is extremely dependent on foreign investment - which makes it very vulnerable.

Pounds Sterling

The British Pound crashed by a severe 8% on Friday in a "flash crash" that has been blamed on computer-driven trading gone wrong. The bigger gist, however, is the decline of the UK's currency over the course of the week.

Against the Dollar, the pound fell 5% last week as the market perceived various political comments to mean a "hard" brexit was in the offing (a hard brexit is when Britain sacrifices commercial ties with the European Union in favor of things like more control over immigration).

If there are tougher obstacles to doing business with the European Union, it would have a negative effect on the British economy (companies will prefer to base their European operations somewhere apart from Britain).

Britain is extremely dependent on foreign investment - which makes it very vulnerable. The country has more money coming in than going out and this weakens demand for the pound.

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This is because pounds will be leaving the country to be turned into other currencies, something Britain had traditionally countered by foreigners investing in Britain.

The problem for the pound is that when investors no longer see Britain as worthy of investing in, they will take their investments elsewhere, and demand for the pound (and its value) could fall even farther than it already has.

Despite the turmoil facing the Pound, the FTSE 100 - a collection of Britain's biggest 100 public companies - rose 2% in value. This misleading though, as most of these companies have huge operations outside the UK (e.g drug manufacturers who sell their drugs all over the world).

Most of the income of these companies is in currencies other than the pound which means when the value of the pound goes down, the pound-denominated income of these companies go up.

Pulse Business will bring you more on currencies across the world as well as the latest news on financial markets.

folarin okunola