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OPINION

Sterling's trade-off

Sterling's trade-off
August 18, 2016
Sterling's trade-off

I don't say this because the pound is undervalued. Brexit (if it actually happens) will probably reduce the UK's long-term growth rate. That justifies a weaker pound. So too does the UK's big current account deficit.

Instead, there's another problem. Sterling is cyclical; it rises in good economic times. And these good times are often global ones, not just UK ones. There's a strong correlation between sterling's trade-weighted index and US industrial production - of 0.66 for annual changes since 1996. For example, sterling fell when US output fell in 2001-02, 2008-09 and in 2015-16. And sterling rose when the US grew well in the late 1990s, 2004, 2007 and in 2011-12.

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