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Sterling falls to new seven-year low against dollar amid warning over Brexit

Published 24/02/2016

The pound first hit seven-year lows against the dollar on Monday
The pound first hit seven-year lows against the dollar on Monday

The pound fell below 1.40 US dollars for the first time in nearly seven years as a report warned sterling could see its value plummet by a fifth if the UK votes for a Brexit.

The pound may fall between 15% and 20% against the dollar, while UK economic growth could also drop 1.5 percentage points if Britain decides to leave the European Union, according to researchers at HSBC.

Such falls would see the pound reach levels against the dollar not seen since the 1980s, putting it on close parity with the euro.

The report comes as sterling fell to a fresh seven-year low against the dollar, down 1% to 1.388, with its value against the euro also coming under pressure, falling nearly half a per cent to 1.266.

HSBC said in a research note that a Brexit would have "potentially huge consequences for all asset classes".

"Following a vote to leave we think uncertainty could grip the UK economy, triggering a potential slowdown in growth and a collapse in sterling," it added.

The pound first hit seven-year lows on Monday after London mayor Boris Johnson's decision over the weekend to join the campaign to leave the EU.

It was sterling's biggest one-day drop in almost six years.

Experts said the aggressive sell-off of the pound had pushed back further the prospect of any rise in UK interest rates, which have remained at 0.5% for nearly seven years.

Lukman Otunuga, research analyst at foreign exchange broker FXTM, said: "This latest development has provided yet another reason for the Bank of England to push back interest rate expectations."

He added: "With the UK interest rate expectations repeatedly pushed back, UK inflation growth following a tepid path and the current Brexit theme eroding investor attraction towards the sterling, prices may be left vulnerable and open to further losses."

Bank of England governor Mark Carney confirmed in a hearing with Treasury Select Committee MPs on Tuesday that there had been a spike in sterling movements on a par with levels seen in the run-up to the Scottish referendum.

Fellow rate-setters at the Bank confirmed that a sustained hit to the pound caused by Brexit uncertainty could have an impact on the timing of any interest rate hike.

The weakness of the pound would push up inflation as imports become more expensive, which could bring forward the prospect of a rate rise, but Brexit fears could also lead to weakness in other areas of the economy, which may push a hike even further away.

Gertjan Vlieghe, a member of the Bank's Monetary Policy Committee, told MPs: "It is possible at some point that increased uncertainty from foreign exchange investors also ends up manifesting itself in increased uncertainty by households and businesses which may, or may not, delay or reduce their spending.

"So far we haven't seen very clear evidence of that, but we are watching very carefully."

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