According the press this week the UK is facing another Black Wednesday over the levels of foreign currency held by the central bank. In 1992 the Tory government tried to prop up Sterling while exiting the exchange rate mechanism by buy its own currency using its foreign exchange reserves, which turned out not to be enough. This reportedly cost the economy over £3bn.
Today the country holds only $70bn in foreign exchange which according to the press ranks us 24th in the world behind even Poland! And compared to China’s reserves of over $3trillion we do look a little light but what these stories fail to point out is that the Eurozone is counted as one place on the board and consists of 18 separate countries that in total only hold $220bn in reserve. Compared to that we are looking better.
Meanwhile in the Eurozone inflation has fallen from 0.7% to 0.5% prompting more fears of deflation that would have a direct impact on their member’s debt repayments. The ECB has a target of 2%, which it hasn’t met in years, and with interest rates reduced recently to .25% the bank has little left in its arsenal to promote growth.
The USD has seen further gains in anticipation of strong employment growth when their latest report is out today, which will place increased pressure on the FED to cease to financial stimulus and consider raising interest rates.