United Kingdom: The British Pound

Background:

The British pound is the world’s third most widely held reserve currency. Its history is one of long periods of strength followed by sudden devaluation. In September 1992, in an incident known as “Black Wednesday,” the pound devalued sharply, resulting in its rejection from the European Community’s Exchange Rate Mechanism (ERM). The pound devalued once more between mid-2007 and 2009, after a period of overvaluation driven largely by the housing market bubble, and the belief—based on good economic performance in 2001—that the UK economy was impervious to the cycle of boom and bust. Bank of England Governor Mervyn King welcomed the devaluation on the grounds that allowing the currency to fall a certain amount would increase export competitiveness, helping to reduce the UK economy’s reliance on debt (both government and public), built up during years with a strong currency and hot money inflows. Just such a strategy helped the UK out of recession in the 1990s.