Brown resignation rumour sends pound plunging

Posted By: Edmund Conway at Jun 4, 2009 at 16:37:00

This is what happens when politics and febrile Westminster rumour collides with the currency markets.



At around 12.15 or so this afternoon a rumour starting whipping around the currency markets that Gordon Brown was about to resign. In the space of barely three minutes sterling plunged by more than 3 cents from almost $1.64 to below $1.61. This was a massive plunge, the likes of which we have rarely seen, even in these times of crisis.

As you can see from the chart below, the pound did more or less the same against the euro, so this was almost certainly a pound-specific feature rather than cross-winds from overseas.



Why, though, did the pound fall rather than rising? Given Gordon Brown has been so closely associated with the ballooning level of public debt, one might rationally have assumed that either a) his successor would be more aware that in order to avoid losing the UK's AAA credit rating he or she would need to bring spending and borrowing back under control or b) his departure would trigger a general election in which the rather more parsimonious Tories would come to office. These moves would probably be bullish for the pound, since they would, in the long run at least, lessen the chances of a sovereign debt crisis.

However, when currency markets sniff the prospect of chaos, they run scared. When Peter Mandelson berated my colleague Richard Tyler for the Telegraph's expenses story, he did have a small point: if investors think that a country's political stability is under threat they will often get their cash out as soon as possible (though of course the business secretary neglected to mention that the expenses scandal was one of the politicians making; our part was to expose it). That is what, for one brief moment, happened earlier this afternoon. Since then, the pound has recovered some of its poise but not, interestingly, much ground. Keep a close eye on the currency markets tonight and tomorrow. They are pulsing dramatically with every piece of new political news.

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