Actually, there are two main reasons.
1. Interest rate expectations. USA cut rapidly, massively and early, with many surprises. The USD weakened on the back of this and we saw a very weak dollar until July this year. On a side-note, for a lot of July, the dollar was experiencing a reasonably strong negative correlation with crude oil.
Then, after July, people started expecting EU and UK to cut rates heavily (they needed to 'catch up'). A lower relative return on funds held in GBP and EUR mean demand falls for these currencies, leading to a lower 'price' (in terms of many currencies; predominantly against the USD).
Had both countries cut rates at the same time, with similar magnitudes, we might well be at GBPUSD ~ 1.8 right now. EURUSD might've been around 1.5. Factors which might affect these estimates are liquidity shifts, flight to quality and correlations with other financial markets.
2. Safe haven buying. The logic behind this isn't entirely concrete, actually. A flight to quality should really lead to buying of gold, but the commodities market seems to suggest we're finding a short term equilibrium in the 700s. This is expensive in a historical context, however.
Investors are holding USD believing it to be 'safer'. This isn't necessarily that the US economy is in 'better shape'. The fact that the markets expect further rate cuts in USA to historic lows is an indication of this. However, historically the USD has been solid and there are few better options. There is not enough liquidity in Emerging Market currencies and the Eurozone's monetary policy has been, in many people's opinions, poorly managed. Furthermore, the large number of accession countries means the EU is more exposed to deep recessions. (For more information on this, look at where the IMF is directing some of their $250bn of economy bail-out funds).
Hope this helps!
1. Interest rate expectations. USA cut rapidly, massively and early, with many surprises. The USD weakened on the back of this and we saw a very weak dollar until July this year. On a side-note, for a lot of July, the dollar was experiencing a reasonably strong negative correlation with crude oil.
Then, after July, people started expecting EU and UK to cut rates heavily (they needed to 'catch up'). A lower relative return on funds held in GBP and EUR mean demand falls for these currencies, leading to a lower 'price' (in terms of many currencies; predominantly against the USD).
Had both countries cut rates at the same time, with similar magnitudes, we might well be at GBPUSD ~ 1.8 right now. EURUSD might've been around 1.5. Factors which might affect these estimates are liquidity shifts, flight to quality and correlations with other financial markets.
2. Safe haven buying. The logic behind this isn't entirely concrete, actually. A flight to quality should really lead to buying of gold, but the commodities market seems to suggest we're finding a short term equilibrium in the 700s. This is expensive in a historical context, however.
Investors are holding USD believing it to be 'safer'. This isn't necessarily that the US economy is in 'better shape'. The fact that the markets expect further rate cuts in USA to historic lows is an indication of this. However, historically the USD has been solid and there are few better options. There is not enough liquidity in Emerging Market currencies and the Eurozone's monetary policy has been, in many people's opinions, poorly managed. Furthermore, the large number of accession countries means the EU is more exposed to deep recessions. (For more information on this, look at where the IMF is directing some of their $250bn of economy bail-out funds).
Hope this helps!
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