UK will recover first

Make no mistake about it, UK will recover first. There is after all only a dozen banks for the government to keep afloat, the giant insurance and re-insurance companies that will suffer from the deleveraging of CDS are mostly French, German and Swiss, and the UK government is first to accept to bite the bullet and lead the way into Keynesian economics.
Already overindebted, the Western economies won't be able to support entire sectors like insurance, automobile, while keeping the banks in business and probably more coming, without re=luanchuing internal deman with public spendings and tax cuts. Both the UK Government and the US President Elect made no secret about it, there will be economic packages and stimuli until the economy recovers. This is probably the spirit of Paulson's U-turn last week, who now prefers sustaining consumer credit than firefighting at financial institutions. The Keynesians are back!

These policies have a bad reputation inherited from the 70s to generate inflation and negatively impacting currencies. The markets understood Gordon Brown's move and reacted accordingly.

But the Fisher equilibrium and the purchasing power parity (PPP) theory are long gone with the globalisation. Moreover, when a currency falls another has to appreciate. Against which one exactly can the Sterling keep falling? The US Dollar? Where a spending plan of pharaonic proportions will be launched as soon as the new President takes office? The Euro? Where governments have their hands and feet tightened by the treaty of Masstricht? If the likes of Italy, Spain or Ireland discard the Masstrich 60% and 3% ratios (%GDP of public debt and spending respectively), which is likely, then Europeans will realise that the single currency was a one way ticket toward a fixed exchange rate system. As there is no plan to readjust a basket or any amendment possible, a confidence crisis might follow that would be as violent as unexpected. Gold? Eventually it has got to be the safe haven when confidence is lost in all major currencies simultaneously. However, as long as the IMF struggles to support the ever increasing list of emerging countries asking for help, it might sell a few tons of its reserve.

Past the panic, it will be perceived that recovery in US will take long. The US Dollar still retains a part of its reserve currency function which limits the US freedom to maneuvre. The EU will be in a state of political dismay that words can hardly describe and emerging markets are too dependent on Western consumption to truly decouple. Only UK can make quick, bold decisions and enjoy the luxury to let the currency go where it needs. UK and the Pound will recover first.