Could the Pound be in trouble?

UK and US economic policies have diverged in what I believe to be a major global economic policy error.

When the banking crisis hit, the Pound underwent a strong sell off all the way to the 1.35-1.40/USD area. The UK was regarded as riskier than the dollar by currency traders due mostly to it’s dependence on the financial world.

The BoE just made a commitment to purchase an additional 50 bln Pounds (84 bln USD) in it’s quantitative easing program due to a deeper than expected recession. That is a full 60% increase from 125 to a total of 175 bln Pounds. The Pound fell on the news.

Meanwhile, it seems that the US has decided to halt it’s quantitative easing program and thus cease printing dollars (we should get this confirmed by next week). The dollar has been rising.

If a recovery does not occur and we get another round of risk aversion, people will flock to the dollar for protection. The fact that the Fed pledged not to continue printing dollars while the BoE decided to do so will make it more of a reason for dollar protection vs. the Pound.

If indeed conditions do worsen considerably, conditions could warrant a Pound collapse or at the very least, the BoE losing all credibility when it backtracks a few months later on it’s increased QE commitment.

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