In Search of Sterling Part 2

Since November 2012, Yen has devalued by over 20% versus The US Dollar. The Pound has closely followed Yen, reaching 7 month lows versus Dollar. Lowering medium term growth prospects have necessitated a lowering in Moodys' UK credit rating. The Pound  is at its trade weighted lowest, since September 2011. Medium term borrowing rates face upward pressure, if UK does not realise real short- term economic growth. Short-term investors currently buoying up Pound could easily drive up borrowing costs, thereby forcing more Pound decline. Only the strength of London as a historical financial hub keeps the country's capital account intact.
Policy makers are in a catch 22. If they borrow to increase 'capital spending' this could send wrong signals to bondholders and lead to a dumping of bonds. On the other hand, if they persist with austerity they have no way of generating medium term growth. Currency speculators have their eye on Pound, thereby ensuring vulnerability and instability . Devaluation, historically, has never generated export-driven growth as evidenced in 1949(30% devaluation), 1967 and 1992. Thus, unlike Yen, Pound devaluations have never improved  industrial sector performance. With empire diminished, Pound has no long-term reserve credibility. If the economy does not improve, they will be more downgrades and devaluations in pursuit Sterling.