How the World Looked Last Time Pound Was This Weak

The British pound is headed toward multidecade lows hit in 1985, but investors and analysts said the forces driving it down now are very different.

The pound hit its weakest level in years against the dollar and euro on Tuesday, dragged lower by investors’ fears grew that the U.K. may leave the European Union without a deal. The U.K. currency has fallen 18.3% since the Brexit vote in 2016, in reach of its recent low of $1.2047 in January 2017.

Before that, the pound hadn’t touched levels this low since the mid-1980s. Back then, high Treasury yields attracted investors to the dollar. Then the U.S. economy surged, with the ICE Dollar Index climbing more than 100% between the ends of October 1978 and February 1985.

The dollar’s climb pressured the pound, which lost 60% of its value between then-recent highs in 1972 and February 1985, falling to $1.052 from $2.644.

Months after a peak in the dollar’s value, a coalition of countries including the U.S., Japan, Germany, France and the U.K. met on Sept. 22, 1985, to hammer out a plan for its sharp devaluation. Part of the aim of that Plaza Accord was to cut the U.S. trade deficit, which had reached over $100 billion in 1984—a sharp reversal from the surplus of the late ‘70s.

Because most of the U.K.’s trade was with Europe, the pound’s weakness didn’t hit most Brits until after Black Wednesday, when the collapse of the pound in September 1992 forced the U.K. to withdraw it from the European Exchange Rate Mechanism—a precursor to the euro that required a stronger pound than the government could sustain, said Kit Juckes, chief FX strategist at Société Générale.

On Black Wednesday, the pound, which was already weakening, bought $1.84 dollars. Within a day, it dropped to $1.78, and by March 1993, it bought $1.43—its decade low.

Today’s swings stem from more parochial factors, analysts said. The pound’s fall in value is an expression of discontent with the U.K. government’s approach to Brexit, through the “invisible hand of the market,” said Petr Krpata, chief EMEA FX and IR strategist at ING Groep.

Few analysts believe the Bank of England would intervene to strengthen the pound, with the central bank likely to act only “to correct a disorderly market,” said Geoffrey Yu, of UBS Wealth Management’s U.K. investment office.

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