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The pound took a fresh beating yesterday as concerns of currency wars and debasement of sterling led to another sell-off and experts said the currency was at risk of a "large-scale devaluation".
Sterling trails only Japan's yen as the worst performer against a basket of international currencies this year as a 4.5 per cent decline fuels import prices and pushes up the cost of food, insurance and other necessities for hundreds of thousands of households. As central banks tolerate higher levels of inflation, the pound is set to weaken further across the board particularly against safe haven gold.
UBS warned that the pound seems clearly at risk of following the yen and "suffering the next large-scale devaluation."
Dealers also noted weekend comments from Bank of England rate-setter Martin Weale, who warned the pound was still too high to help the UK economy rebalance effectively. The continued pressure on the currency comes after its biggest weekly loss since June last year amid gloom over weak growth prospects.
The Bank of England has signalled it is willing to tolerate higher inflation for longer, while the pound's safe-haven appeal has also waned as the European Central Bank makes explicit commitments to prop up Eurozone strugglers and preserve the single currency.
In the U.K., which -- unlike Greece -- isn’t part of the euro area and can devalue if it wishes, there’s growing pressure to do so. A letter recently circulated to some 3,000 influential figures proposed deliberately weakening the British pound to boost exports and hence economic growth. Debasing currencies in this way is promoted as an alternative to sovereign default, as well as to other methods of increasing competitiveness, such as cutting nominal wages.