The British Pound is perhaps one of the worst victims of the
credit crunch, having fallen 25% against the USD in the year-to-date.
According to analysts, hedge funds deserve much of the blame.
Apparently, most hedge funds, including those that are based in the UK,
denominate their portfolios in terms of Dollars. As a result of the
exodus away from emerging markets, such funds have found themselves
awash in cash, which they have promptly converted into Dollars. The
reasoning behind this investment strategy is twofold: first, as the
incredible strength of the Dollar has illustrated, the prevailing wisdom
among investors is that the US is currently the least risky place to
invest. Second, the interest rate gap between the US and the rest of the
world looks set to narrow, which means the yields on US security will
become relatively attractive. The Telegraph reports:
Worldwide interest rate forecasts are being revised downward, which has increased interest in the US where rates have already been slashed.Read More: Sterling caught up in ‘currency market tsunami’
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