Welcome to our account of movement in the foreign exchange rates overnight.
Time for more stimulus then, but will it help? The pound fell against most currencies except the euro yesterday, as both the Bank of England and European Central Bank unveiled new stimulus to boost their flagging economies. This hit the pound, both because it signals the UK remains in the doldrums, and because critics increasingly doubt that QE is having the right effect.
The Bank of England extended its program of asset purchases (known as QE) another £50 billion yesterday, taking the total since 2008 to £375 billion. The idea is that, with an increase in the money supply, businesses will have more access to credit, and so boost growth.
Yet increasingly, data indicates that lending to the real economy is not increasing in spite of this program, as banks use the cash to bolster their balance sheets. Meanwhile, there is speculation that QE hurts pension annuities, which are linked to the value of UK gilts. In this sense, whether QE4 is a boon or not is really a matter of debate at this point.
The euro fell across the board yesterday, as the European Central Bank cut its benchmark interest rate 0.25% to just 0.75%, a record low. This hit the euro because, while lower interest rates should make borrowing cheaper for real businesses, it simultaneously signals the weakness in Europe.
Furthermore, there’s little evidence that cutting 0.25% from interest rates will have a huge effect in lifting the continent out of recession. In that sense, it is more a gesture from the ECB of its willingness to act, rather than something that will see Europe back on its feet any time soon.
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