Pound Slides as Brexit Turmoil Hits Britain Again

Posted November 15, 2018 5:51 p.m. EST
Updated November 15, 2018 5:55 p.m. EST

Big declines in Britain’s currency, the pound, often have signaled wrenching changes for the country. Could this be the case again as Prime Minister Theresa May struggles to win support for her plan to take Britain out of the European Union?

The British pound on Thursday fell 2 percent against the dollar. That’s a large decline for a currency belonging to a developed economy and is the biggest one-day drop since the weeks after Britain’s vote in June 2016 to leave the EU, a process known as Brexit.

Though the pound is down 15 percent since that vote, it remains well above the lows it hit in January 2017, when it was becoming clear that May’s government favored a more drastic separation from important economic arrangements with the EU.

The plunging pound has in some ways absorbed the fallout of the Brexit decision. The currency’s decline made British goods cheaper to foreign buyers, which supports the country’s exports. A weaker pound may also encourage foreigners to invest in Britain because acquisitions look cheaper. Buyouts of British companies are up nearly 150 percent this year.

But there are real disadvantages to a weak currency. Foreign goods cost more in Britain, which pushes up inflation. There also is the possibility that a further slide in the pound prompts investors to dump British stocks and government bonds, leading to the sort of crisis of confidence that can slam the wider economy.

The likelihood of such a rout increases if the process of Britain leaving the EU becomes disorderly. Under the current schedule, Britain would exit in March. Earlier this week, the British government reached an agreement with the EU on Britain’s withdrawal.

On Thursday, however, two Cabinet ministers who oppose aspects of the deal resigned from May’s government, and there are signs that Britain’s Parliament may vote against the deal. What might happen next will depend on whether May can somehow drum up support for the deal, whether her government stays in power, and whether there is support in Parliament for a different type of deal or a second Brexit referendum.

The fact that the pound has not fallen back to its lows suggests investors do not believe Britain will leave the EU without some sort of deal. But time is running out, so this could just be the start of things.