Sterling’s Drop to Parity With the Dollar Is a Growing Risk
Traders fear that high inflation and weak economic growth will make it impossible to keep the UK currency from dropping further.
The UK pound is weak and getting weaker.
Photographer: Tolga Akmen/AFP via Getty Images
British politicians have a complicated relationship with the pound, which has a complicated relationship with the US dollar. Currency crises, as governments tried and failed to defend sterling against the dollar, cost Harold Wilson and John Major their premierships, and once even appeared to end the political career of Winston Churchill. Now, the notion of parity to the dollar is being openly discussed after the pound staged yet another dive, while the government of Boris Johnson struggles with a crisis in the cost of living. Can sterling’s slide be stopped, and what would be the repercussions of a pound worth less than a dollar?
It’s a serious question. Fixed at an exchange rate of more than $2 until the end of the Bretton Woods regime in 1971, the pound nearly touched parity once before, in early 1985. Higher bond yields in the booming US economy, as the aggressive monetary policy of Paul Volcker at the Federal Reserve brought inflation under control, attracted funds out of the UK. A steady decline for sterling famously turned into a rout after a press briefing given by Margaret Thatcher’s press secretary Bernard Ingham made it sound as though the market could make a one-way bet against sterling. The Times’ headline, from Ingham’s unattributable comments, was: "Thatcher ready to let pound equal dollar."