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Dollar in better shape than U.K. pound

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KAI RYSSDAL: Today was another nervous day for the British pound on the foreign exchange markets. Sterling’s been hammered this week as foreign investors fret over the state of the UK’s banks. Of course, our banking system is hardly in great shape. And yet the greenback is still riding high.

From London, Marketplace’s Stephen Beard has this tale of two currencies.

STEPHEN BEARD: This week the British pound fell to a 23-year low against the U.S. dollar.

Neil McKinnon, who’s with the ECU currency group, says dealers have been gripped by an extraordinary fear.

NEIL MCKINNON: That Britain might be going bust, that Britain’s sovereign credit rating might actually be downgraded because of the cost of the bank bailouts and the impact on Britain’s debt level.

The British government is now backing the U.K.’s troubled banks to the hilt. One of them alone, the Royal Bank of Scotland, has liabilities almost double the size of the whole U.K. economy.

By comparision, the U.S. government is much less exposed, says Paul Ashford of Capital Economics.

PAUL ASHFORD: I mean we have had, even recently, bailouts of Citigroup and Bank of America. But so far, up to now, the federal government hasn’t been forced to commit the same sorts of sums.

He says that’s why the dollar is doing better than the pound. Also, the greenback is still the world’s number one reserve currency. In the midst of the crisis that it created, the U.S. remains a safe haven — and much safer than Britain, says Ian Marsh of the Cass Business School in London.

Ian Marsh: While it’s got huge problems, it’s got more depth to it. And therefore at the moment it’s not suffering so badly. That’s not to say it won’t if continuing bad news keeps emerging from Wall Street and Main Street America.

For now, however, the pound is taking the heat. And some dealers even predict it could hit parity with the U.S. dollar.

In London, this is Stephen Beard for Marketplace.

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