Risk and the UK exchange rate

Abstract

Sterling has fallen markedly against other currencies in the past few months, and in January reached its lowest point against the euro (or its equivalent) since the last quarter of 1996, as we can see from figure 1, which uses the first three weeks of January 2008 as an indicator of the value that will be achieved in the whole first quarter. Sterling has also weakened against the dollar in the past few months, although it remains at a high level. In effective terms, sterling fell on average by 2.5 per cent in the fourth quarter, and in early January it was more than 6 per cent lower than the average for the previous quarter. The fall was largely unanticipated, and the effective exchange rate for the first quarter of 2008 is more than 7 per cent below where we assumed it would be in October 2007.