History shows pound not heading off a cliff

By Veronica Brown - Analysis

LONDON (Reuters) - The pound's breath-taking slide to two-year lows against the dollar is one of the most significant in the past 20 years and may look like a crisis, but history indicates that it won't fall much beyond fair value levels around $1.60.

The pound's decline from a psychologically-key $2 started a month ago and gathered intensity last week to culminate in a 6 percent drop so far this month to as low as $1.8510.

Monthly falls of 6 percent or more have only occurred seven times in the last 20 years, Reuters charts show, but in almost all those cases it has always bounced back from the fair value level of around $1.60.

The latest drop has set it on course for the biggest monthly decline since January 1997 -- the year the UK political landscape shifted from 18 years of Conservative rule to the-then New Labour government.

"It's come back from a level that was grossly overvalued to one that is becoming sensible. There is further to go," said Trevor Williams, head of group economic research at Lloyds TSB Financial markets.

Looking at the other major falls, however, the latest correction pales against the 12.7 percent drop in sterling in October 1992 that accompanied Britain's exit from the euro's Exchange Rate Mechanism (ERM) precursor.

The pound's darkest hour was defined by declines of more than 10 percent in both September and October 1992, culminating in a 25 percent devaluation to $1.51 at the end of the year that earned mega-investor George Soros around one billion pounds.

Few analysts expect anything near this type of calamity this time round, even as it approaches fair value levels.