2008 Financial Crisis--- Impact on British Exchange Rate

As far as I know, 2008 financial crisis gave a strong impact to the UK's economy and financial market. The growth rate decreased sharply from the end of 2007 until 2009, there was a large fall in retail sales, massive companies went to bankruptcy which led to a substantial high unemployment rate especially in the 18-24 age group. Severe reduction could not be ignored in both personal and corporate credit besides a rapid downturn in the housing and construction markets. Since then, British sterling exchange rate depreciated dramaticlly just like the year of 1992 (black Wednesday).

As we all know, financial sector is one of UK’s core industries. Since UK’s economic scale is smaller than the USA, when crisis happened, it would absorb stronger adverse impact than the USA. The truth is UK’s financial system suffered a crushing blow.

This economic phenomena can be distinctively reflected on the forein exchange market during 2007 to 2009. As far as I concerned, exchange rate floating is highly sensitive than any other financial derivatives, high risk shifts in high profit. Most of the instant financial affairs and information can be reflected on the exchange rate immediately, it could be a deep gap in even one minute, not to mention a global financial crisis.
                      Figure 1: British sterling exchange rate (2002-2012)

source: Financial Times, 2002-2012 £/$ currency pair yearly change        

As we can see from the figure 1 above which the sterling and US dollar curreny pair exchange rate is based on yearly changing. between 2002 to 2012. The sterling exchange rate towards US dollar on 5th Nov 2007 is 2.12$/£ which decreased dramatically to 1.35$/£ on 19^th January 2009, GBP sterling dropped nearly 7700 points, 27% within one year and a half, the largest decline since 1971. I think nobody could ever anticipate such a steep decling even in the middle of its endless decreasing and never could they make a guess of its ending point. Some of the trader in the foreign exchange market might have seized the opportunities to sell on sterling and gain profit, however, some may be forced to liquidated without correct risk hedge and management.


''There are emerging signs that the worst may be over, although recovery is likely to be slow.'' (John Kitching, 2009). All the passive information indicated that UK would go through a long-term Great Depression series after financial crisis. While three years afterwards, it looks like UK’s economy embarked on a slow but steay recovery road.


Sterling exchange rate reached its lowest point in March 2009 and climbed up slowly with the same pace of economy recovery resistantly. The devaluation of pound results in significantly reducing of tuition fees for foreign students planning to study in UK, shrunk the prices of luxury goods. How is the the huge depreciation in sterling had affected on UK imports and exports? This will be debated in coming posts.