You are using an older browser version. Please use a supported version for the best MSN experience.

Pound drops to 31-year low against dollar on Brexit concerns

The Wall Street Journal. logo The Wall Street Journal. 10/5/2016 Mike Bird

UP NEXT
UP NEXT
Strategists expect further volatility in the pound as London and Brussels negotiate the terms of Britain’s exit from the European Union.

The pound fell to a 31-year low against the dollar and has declined 1.9% over the past two sessions after U.K. Prime Minister Theresa May on Sunday set a March deadline to begin exiting the EU and indicated that maintaining its privileged access to the country’s largest trading partner was a lower priority than controlling immigration.

Late Tuesday in New York, the pound fell to $1.2729, compared with $1.2841 late Monday. The U.K. currency has dropped 14% against the dollar and 13% versus the euro since the June 23 vote to leave the EU.

Investors worry the exit could hurt trade and investment in the U.K. and damage the country’s financial sector, considerations that have weighed on the pound.

“The tone that Prime Minister May used has been uncompromising,” said Robert Wood, U.K. economist at Bank of America Merrill Lynch. “That’s what sterling has been focusing on for the past two days.”

This year, sterling has been among the worst-performing major currencies against the dollar. Most currencies of the Group of 10 leading industrial nations, the 10 most commonly traded in foreign-exchange markets, are up against the greenback.

Meanwhile, the U.K.’s FTSE 100 closed near a record on Tuesday, showing the complicated calculations investors are making as the country’s planned exit from the EU takes shape.

The move higher in stocks was driven in part by investors’ belief that a weaker currency could help larger companies that make a lot of money from exports. Such companies are heavily represented in the FTSE 100, which as a group book 70% of their revenue from abroad.

© Zuma Press

More notable, the FTSE 250 index of smaller companies—more vulnerable to shocks to the domestic economy—closed at a record. That comes amid a recent raft of better-than-expected economic data. The pound’s weakness is one reason why, as British exports become more competitive.

On Monday, the September purchasing managers index for manufacturing came in at 55.4, its highest level in two years. Any reading above 50 indicates that a sector is expanding.

Many analysts believe the U.K.’s good run of economic data won’t last if investment falls amid uncertainty over how Britain’s trade deal with Europe will look.

“The recovery in several gauges of sentiment and activity after the immediate shock has prevented more material declines, but in our view it is only a matter of time before less positive data starts to appear,” said John Wraith, head of U.K. rates strategy at UBS Group AG.

Still, the weak pound is boosting some U.K. companies.

Drug company GlaxoSmithKline PLC’s core operating-profit growth rose to 36% from 15% in the second quarter.

Jeff Smith, managing director of British plastic-products manufacturer Osprey Ltd., said the declining pound has added some “12% to 13% to the bottom line.” The company’s sales in euros are now worth more, and the company is able to quote lower prices for new contracts.

“It’s a comfortable feeling going to Europe now, because we are cheaper,” he said.

The pound’s tumble is less comfortable for companies that import materials or goods.

Dakram Materials Ltd., a chemicals supplier and distributor of cobalt and nickel products, is paying more for the dollar-denominated commodities it uses.

“It has changed our strategy,” Managing Director Kate Migay said of the higher costs and the wider impact of Brexit, adding the company is now considering new revenue streams.

British companies’ raw-material costs rose in August at the fastest annual pace in nearly half a decade. Overall, import prices rose 9.3% year over year.

Write to Mike Bird at Mike.Bird@wsj.com 

AdChoices
AdChoices
AdChoices

More from The Wall Street Journal

The Wall Street Journal.
The Wall Street Journal.
image beaconimage beaconimage beacon