Tuesday, April 17, 2007
Pound Breaks $2 Barrier
The Pound has just broken through the $2 barrier. While tourists and importers will give a rousing cheer, exporters will be holding their heads in their hands. I believe in a strong currency, but more important is a sustainable currency. There's nothing worse for a trading business than a fluctuating exchange rate. With another interest rate rise on the horizon here, and a rate cut in the US it's possible to imagine the Pound hitting $2.25 before too long. I am no economist, but I have my doubts as to whether than is a healthy trend, at least in the short term. Discuss.
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59 comments:
Call me selfish because I don't give a damn about exports. However as a tourist I am really looking forward to my next US trip.
Highest trade I saw was 2.0004 then slipped back.
Is history about to repeat itself?
I seem to remember a similar situation when the pound was high against the german DMk and several other currencies which led to Norman Lamont hiking up interest rates to about 24% and we were unable to sell our goods abroad.
Or has my memory warped with time?
Talk about a lightweight post. I see you won't be challenging for the role of Chancellor Iain.
You obviously felt the need to say something, but are clearly too ill-informed to offer any real insight of your own.
Still lightweight is the Cameron way...
The story is not of a strong pound, but a weak dollar. The pound has been stable against the Euro since Jan 2003. Of course, this means that the pound is also strong against those who peg their currencies to the dollar, but there is not a lot we can do about that.
Exporters bellyache about the FX risk but the sophisticated securities markets give them any number of efficient ways of hedging their FX risk. Most are too feckless to do this.
Britain has had an over-valued exchange rate for over 30 years, with the result that manufacturing has been virtually eliminated.
The industries that have benefited are City finance and warehousing & distribution.
It has always seemed to me that this was Thatcher's intention - to sacrifice manufacturing to finance and get rid of the bolsy unions. The City of London is now globally preemnient, and the British serve the City.
Is this a good or a bad thing? It depends on your criteria. I think it is appalling. What is there for youth except to become financiers or work at MacDonalds.
What will happen to inflation? That all depends on what our suppliers in the Far East do with their exchange rate. Once the Chinese stop relating the Yen to the dollar and stop holding US government bonds, then their prices will go up and we will have to pay them whatever they charge, having got rid of our manufacturing capability. Because once manufacturing has gone it's gone for a generation or more. We already have raging inflation in the property market since the Chinese haven't worked out how to make land. Property market inflation has deliberately been excluded by Gordon Brown from the inflation index that the Bank of England has been told to 'control'.
I'm an old fart. Apres moi le deluge. I'm glad my sons live in Canada.
Don't forget that although the Pound is not in the Eurozone, nevertheless the Government is obliged to keep the Pound - Euro exchange rate within small limits. It's all part of the Stability Pact.
I agree that it is the Dollar that is weak - and given that oil is priced in dollars then the lower cost in Pounds of oil (and hence 'eventually' the price at the pumps of petrol) should be giving our energy bills a bit of relief. I am still waiting for this last point!
What would happen if China started to dump its huge dollar holdings on the Foreign Exchanges? - disaster for the US currency methinks.
I don't give a damn about exports.
How remarkably short sighted. We still have to "pay our way".
Hmmm... I think the City will do well regardless of where the exchange rate are headed.
What is more interesting than the exchange rate is the inflation rate. If it starts taking off again, with interest rates in hot pursuit, then life is going to get extremely interesting (in the sense of the old Chinese curse) indeed.
"There's nothing worse for business than a fluctuating exchange rate." Really? I think you will find that excessive interest rates, high inflation and heavy taxation are considered far worse.
What do you want - a return to Bretton Woods?
Keep it light Ian - economics might be an area for you to avoid.
Speaking for myself this is pretty disastrous. I earn all my income in USD as do most of my friends here in the City. However it is not the strength of GBP so much as the USD having so little fundamentally going for it.
Chad 10.13 AM said...
"Talk about a lightweight post. I see you won't be challenging for the role of Chancellor Iain.
You obviously felt the need to say something, but are clearly too ill-informed to offer any real insight of your own."
You don't need to know much about economics to be a successful politician. Lord Randolph Churchill (Winston's father) said (about decimal points) "I never could make out what those damned dots meant." He was Chancellor of the Exchequer at the time.
You see how well the English speaking peope look after each other and work together. The US economy is not in a very good state so they let the US dollar weaken; meaning that their exported good become cheaper and more tourists visit since it is cheaper. As a result the US economy has more money to buy on US made products and services.
Whilst the USA helps the other peoples of the english speaking world (this great union which has given us liberty and rule of law and the language of Shakespeare) by.... erm getting more money into the US economy to buy products and services from US companies.
When will people realise that the US looks after its own and bugger the rest of the world. Friends yes; but this just shows that you can give the USA sweat; tears and (lots of) blood but when the chips are down they look after themselves - in the USA the USA comes first.
Yes there is some irony in this post; but I;m not being anti-american. Quite right the USA puts itself first; pity the UK doesnt put the UK first.
So bad for exporters (exporting to USA) but good for oil&gas consumers (priced in $US).
The whole floating currency regime is a preposterous competitive devaluation anyway - eventually they'll all be worthless. Bring back the Gold Standard!
How fortunate that we sold our Gold Reserves before the price went up.
it's great for American companies- they can sell their goods nice and cheap.
When will Brits "get" that it is not about you.
> Hardatwork said...
>
> Speaking for myself this is
>pretty disastrous. I earn all my
>income in USD as do most of my
>friends here in the City. However it
>is not the strength of GBP so much >as the USD having so little
>fundamentally going for it.
Going to have to hang on to the current Porsche for another year? Ain't life a motherfucker....
If the Chinese use their dollar holdings to buy land when the US property market falls the will be able to sell Manhatton back to the Indians (Red).
It isn't that the £ is rising but that the $ is falling.
On the other hand, over the longer term, we see interest rates slightly higher than they naturally would be to choke off the rise in house prices. The rise in house prices is because our planning system prevents builders buiding to satisfy demand (this both increases intirial prices & fuels a speculative boom). Unnaturally high interest rates not only push up the £ but prevent industry investing.
We shouild let builders build.
Iain, to be honest the problem is not the other side of the atlantic - the problem is another interest rate rise HERE.
The difference between the previous property crash is that more people have mortgages and more of them have much much higher multiples. I know mine is!
Another rate rise will badly affect me. Perhaps I should transfer my mortgage to a US lender.... Oh if only...
What you really want is a Yen mortgage!
Economic status tend to agree with $ weak status.
Anecdotally do remember when previous $2=£ being mugged in New York at a (coughs) reasonable Manhatten hotel where breakfast cost over £30 (& that was in the last century)!
Part of current rate due to expectations of interest rate increases in UK and possibly reductions in US.
On UK front "REAL" interest rates - I measure 3 month sterling libor less the RPI are I believe at historically very low levels.
Politically - Inflation and interest rates bad news for Brownie - further competence questions, letter from Governor of BOE re inflation CPI > 1% over target and his response etc etc
The pound is rising relative to the dollar simply on the expectation of further interest rate rises from the Bank of England.
The inflation rate (fiddled CPI) has gone above 3% which will force the Governor of the BoE to write an open letter explaining why he has allowed this to happen. RPI is now at 4.8% and rising.
The reason, of course, is that Brown has deliberately allowed inflation to let rip to fuel his pyramid scheme economy with more debt and spending. He has also filled the BoE's Monetary Policy Committee with his stooges preventing interest rates rising high enough to counter inflation.
Perhaps Mervyn King will also shed some light on why he was outvoted on the MPC by 5 to 4 in August 2005 when interest rates were lowered against all economic sense. Did the heavy hand of the Chancellor play it's part I wonder? It certainly had the desired effect as borrowing to spend went into overdrive again leaving the massive debt hangover we see today.
Brown is the man to blame for inflation getting out of hand so I wonder if Mervyn King will point that out in his letter.
It was also done so Brown could boast about years of growth to help his passage into Number 10 omitting to mention that the economy was little more than a pyramid scam fuelled by ever increasing and unsustainable debt.
Anyway, interest rates to rise next month and 2 or 3 times thereafter. What's the betting on 6% by the year end?
House price crash, and collapse in sterling here we come, followed by recession. Thanks to Brown.
If you want to play safe then sell your house now and swap your pounds for euros or yen. It's going to be a rough ride.
"House price crash" etc
B&B - Do you work for the Daily Mail?
""Guido Faux said...
"House price crash" etc
B&B - Do you work for the Daily Mail?""
If B&B worked for the Daily Mail his comment would also have included comments on how women can get thinner and also another comment on how bad the media is for saying women should be thinner.
Black Wednesday was the best thing that happened to the British economy for decades. It jump started the economy as it meant exporters could slash their prices or have a huge windfall. Shadowing the DM had been a stupid policy and overvalued the pound.
Freefalling the pound created the golden economic legacy inherited by Brown. Unfortunately he has blown it with excessive borrowing and spending.
A combination of lower interest rates, ever more creative lending up to 5 or 6 times earnings, shared equity and the population influx without building enough new houses has led to inevitable unsustainable house price inflation. Note furniture inflation reported is linked to a new surge in the last few months in property prices.
The surge in equity release from increased property values and personal credit is giving a huge inflationary injection into the economy.
The level of government borrowing, 30b a year in interest alone, and the pensions black hole is also unsustainable.
Brown has created the conditions for inflation to take hold, but then uses the single weapon of interest rates as the means to control it. This seems very dangerous. It is like using the accellerator peddle and the brake at the same time. Something has to give way at some point.
As an exporter to the US, I find myself in a very difficult position. My US agent cannot keep putting up prices-this has already had an effect on sales!
We cannot afford to reduce prices as our costs keep rising - namely transporting goods and wages.
The effect of todays's Inflation news is that the wage increase for this year will be higher than expected.
This is the result of 10 years of Labour Government.
If anyone had looked at the Money Supply figures in the past 9 months - they should have expected Inflation to rise.
We are an efficient small business - we cannot possibly operate on fewer staff.
Thank you for nothing Gordon Brown!
"guido faux", are you that deranged cretin Tim Ireland?
And do you have anything sensible to say or are you just upto your usual pathetic trolling?
Fact is the emperor has no clothes. Brown's miracle economy will soon be going up in smoke.
The 50p dollar is here and yes, the dollar has slipped recently against a basket of currencies but today it's sterling that's in the limelight.
The news that CPI inflation is at 3.1%, way above the Bank of England target of 2%, is significant, especially since it represents the highest level of inflation since the index began in 1997. For tradition, the RPI (the older measure of inflation) is at a stonking 4.9%.
All of which means a rise in interest rates is on the cards in the UK. For Iain's education, this has the effect of encouraging people to buy sterling, since they can deposit their money for higher interest rates and the increase in demand drives up the value of the currency.
Overall, the outlook isn't good for the US or UK economy. If the dollar keeps sliding, the US will have to raise interest rates to keep the funding tap open for massive current account imbalances, which would certainly prompt a guaranteed recession. With the US housing market sliding away (Citigroup warned yesterday on rising mortgage defaults), the outlook isn't good in the first place but the dollar only compounds things. A US recession will prompt a global slowdown.
So perhaps now isn't the time to buy a house or to think of adding a flat to the property portfolio...
b&b
"Tim Ireland"
Ha Ha - I thought he was a socialist? Mocking the DM does not make me Stalin.
Brown really doesn't have that much influence - it's all down to the relationship beween USA and China. As long as globalisation keeps interest rates low then Brown can borrow as much as he wants.
As for "House price crash" - I keep raeading about it in the DM and in comments over at order-order but it hasn't happened yet ...
Inflation is up 50% in a year!
Well done GB for ending "Tory" boom and bust.
Mortgage-holders are about to get stuffed.
Just the right time to buy a hell of a lot of state of the art defence products.
Anon 10.03 wrote:
"Is history about to repeat itself?
I seem to remember a similar situation when the pound was high against the german DMk and several other currencies which led to Norman Lamont hiking up interest rates to about 24% and we were unable to sell our goods abroad.
Or has my memory warped with time?"
Well, yes, your memory does appear to be warped. The truth of what happened in 1992 is basically the exact opposite of what you say. Sterling was actually falling like a stone during the period, such that even the Bank of England ran out of money trying to support it. If the pound had been too strong, the bank would have cut rates, not raised them to 24%.
As to our being unable to sell our goods abroad... well actually the whole episode led to an export boom
Other than that, you are bang on.
Juest read the Governor's letter explaining why inflation is so high.
http://news.bbc.co.uk/1/hi/business/6562723.stm
He says there has been "five consecutive quaters of robust growth", but the "CPI inflation has been rather volatile from month to month" - this month he expressed surprised by the price of milk not falling and a 10% rise in furniture prices.
So let's get this straight inflation has been rising for 18 months, there has been robust growth for 18 months and is known to be a little volatile, yet this lot sail so close to the wind that they have to rely on the price of milk falling to stay below the target.
These clowns should be playing it safe, not gambling that milk prices will fall.
I think the Governor should be considering his position.
Yes, but it is the US racking up multi trillion dollar debt which cannot be sustainable long term.
Now the genie is out of the bottle it's going to be very painful to get it back in. Roll on 7%.
Just read Gordon's response.
He signed it with a felt-tip pen!!
Do they not let him have anything sharp in case he does stabs anybody during one of his outbursts?
Milk price misbehaving?
Why, simply remove it from the CPI basket of goods and replace with something in a downward trend - et voila! low-inflation economy.
Even if interest rates rise by 0.25% in May and then again in the summer, it's still miserable for savers. Interest, net of basic rate tax, on even the highest paying savings account, is lower than RPI inflation. Which means that even saving makes you poorer, although of course it's better than putting the cash under the mattress.
In other words, rates need to rise a lot more to make it attractive to save and not spend.
As for inflation, as others have said, the cat is out of the bag. The Bank of England's dithered for too long.
"There's nothing worse for a trading business than a fluctuating exchange rate."
Iain are you pro Euro then? Surely you must be if there is "nothing worse"...
Guido Faux said...
Milk price misbehaving?
Why, simply remove it from the CPI basket of goods and replace with something in a downward trend - et voila! low-inflation economy.
That's what the Tories did in the 1980s. Nigel Lawson was a master of manipulating tax rates like duty and VAT on items to ensure favourable inflation figures.
Oh poor savers - not getting enough return on your money....
So if interest rates increase - does it put your house at risk? No. In this political climate think yourself lucky you've got any money to save.
If you live in the real world you might find that saving just isnt an option.
Just seen that while CPI has gone up by 50% from a year ago, RPI (which until it started rising was the preferred measure) has nearly doubled to 4.8% since the measure was changed.
That is shocking. This government is going to go down in flames in exactly the same way that all Labour governments do, it's just taken longer this time.
"US racking up multi trillion dollar debt"
A declining buck is the subtle way to default, but it's the only realistic solution.
Meanwhile what can China do? Dump Treasuries? That's a market-moving event which would render the rest of their portfolio worthless. No, they will buy more, as will the Japanese.
Many thanks R WHITES for straightning my grey cells.
It would appear then that we have the very opposite of the Lamont syndrome but this "spend today pay later chancellor" has managed to screw up when what you describe should be "ideal conditions"
Could it be down to the wars we are now involved in plus the amount of money that has been wasted in the name of improving things like the NHS, education, pensions etc......
Perhaps history will now judge Brown and Blair as the most incompetant pair ever witnessed.
A title the richly deserve!
"guido faux" apologies for mistaking you for that clown, Tim Ireland.
However, the growing economic crisis in the Uk is about much more than the "relationship between the US and China".
Debt levels in Britain are now at an unsustainable level (witness growing defaults, repos, bankruptcies etc) and still growing. But this is still at an early stage and much worse is to come.
Private debt is now £1.3 trillion and growing, while Govt debt is £600 billion which doesn't include hundreds of billions off balance sheet (PFI, public sector pension liabilities etc)
The economy is smoke and mirrors, several years of growth fuelled by equity withdrawal (MEW) from a huge house price bubble which has left the UK with a massive trade deficit.
Watch the bubble burst taking this Enron style economy and the over-inflated pound with it.
You can thank the prudent Chancellor for that.
Half per cent rise in rates next month anyone? The odds have shortened dramatically today, though personally I suspect they haven't got the bottle for it and will hike in .25 increments upto 6% by the end of the year.
Now the true genius of Brown is coming home to roost....teh BOE will have to raise rates and at an every increasing pace to stem the inflation in the uk economy. This will burst teh insane house price bubble leaving a massively overleveraged economy in tatters. Shared 'appreciation' mortgage anyone??? No didnt think so.
All of you waiting to get on teh housing ladder have only to wait for 18 months and they will be throwing the keys at you. Personal bankruptcies have been rising for the last 2 years and with the ease you can now dodge your debt (much easier than in the last property crash) you will getthe double whammy of both mortgages and personal loans defaulting at an ever increasing rate.
the £/$ is only a sideshow really given the main cause is $ weakness coupled with higher UK rate outlook. Whats been happening in the US housing market of late? Exactly, a huge collapse of the weakest credits in the sub-prime market.
The UK has been living in a fantasy world of economic mismanagemt, fuelled by the NuLab lies of greatest economy in years whilst the economy deteriorates at every level. We have red-tape stifling businesses, increased tax burden for all companies, a bloated and wasteful public sector sucking the vitality from the economy and its all about to implode.
The greatest of all NuLab lies has been the economic performance and it is only fitting it will be this that finally destroys the Labour party for good.
Sell short sterling, sell sterling and sell Labour seats at the next election. Thank god its nearly over.
Meanwhile deposit rates are going up so all of us who hve saved rather than chavving about borrowing money to do up overpriced houses are laughing our heads off.
Sorry to gloat but when youve had idiots bragging about how much they are worth on paper for teh last 5 years I think i can be excused......
All of you waiting to get on teh housing ladder have only to wait for 18 months and they will be throwing the keys at you.
Possibly not, because when house prices are falling banks aren't stupid enough to lend money on them.
Can't believe it's taken this long. Let's hope that we're now in for another 20 years of Conservative administration.
So perhaps now isn't the time to buy a house
Whoops. I am one of those responsible for the recent (final?) surge in prices having overpaid to get onto the ladder. I'm giving up all unecessary (non-food) spending as of today. Hopefully my one-man effort will bring inflation back down to Earth.
Bad news for ex-pats. Even back in 1998 it was far cheaper ordering English books from the US rather than from the UK.
Ouch ouch ouch.
btw. It's not even that great for tourists. Hotels in Manhattan now are charging twice as much as they were a year ago even in the off season because of the influx of tourists thinking they're getting a great rate.
So that iPod that's 50 pounds cheaper is costing you an extra 200 dollars on the cost of your hotel room per night.
Not very good at economics did you say? Not half! American is drowning in a swamp of its own devising. "Everybody hates us, we don't know why, let's drop the big one now." Randy Newman, political science - recommended.
I order a lot of stuff from America so this is pleasing to me.
Buy dollars at say $2.10. Wait for the crash, which appears looming, and then buy pounds at $1.50.
Bob's your second cousin twice removed! Sizable pound profit to dump into the old mortgage.
If you're a capitalist bastard with an eye for a buck, there's always a chance to make a few squids, even with Gorgeous Gordon in charge of the economy.
That still doesn't mean I wouldn't love to see the bugger being sent back to the drafty, dank manse from whence he came with his tail between his legs, though.
I'm happy because it means cheaper US-based hosting and bandwidth packages. However, it can always work the other way over time if you're not able to move your hosting to the cheapest country quickly enough.
This news has been coming for years.
The Dollar has so many fundamental weaaknesses that it is surprising it has taken so long for the psychological $2/£1 barrier to be broken.
Consider:
1. Rise of Asian exports and the IT revolution that helped to reduce prices in US (thus resulting in lower interest rates; sapping the dollars strength). Note due to housing pressures and less open economies European markets have suffered less price depression as a result of this trend.
2. Rise of the Euro as a competing store of value for 'international investors'. (Previously if you wanted to store your money in a stable and, most importantly, liquid currency, you had little option but to get hold of dollar denominated asset classes; with the rise of the Euro (which incidentally is governed with less political pressure than the dollar) this monopoly has dramatically disappeared; with the result that year on year foreign investors (such as those selling oil for example) are gradually switching from dollar holdings to Euro's.
3. US balance of trade deficit stands at $2 BILLION DOLLARS A DAY! Roughly meaning that each day the US needs to attract net investments to that amount to merely keep their currency stable.
There are of course a myriad of other reasons; including post 9/11 tax cuts, but the key factor is that the US needs to undertake a structural repositioning of its currency/economy. From being number one exporter (2004) it is now looking at third place for 2007; and within probably 4 years the Chinese economy will be larger than the US on a Purchasing Parity basis.
In short, the next American president needs to follow a sensible and sustainable fiscal policy and thus stop subsidising industry's that will not be able to compete in the global economy of the near tomorrow.
We have all heard about the stupidity of trying o 'spend your way out of a recession'; well, it looks like the US is trying to 'spend its way into one!'
sell all assets borrow as much as you can.inflation will put you a head of savers.buy back assets when they fall in price.ubprd
i) Sterling is not the issue. It has been remarkably stable against the euro and has even been depreciating against the NZ$ and the AUD$.
ii) The US$ is the issue. Two of the world's major currencies have been steadily depreciating for a number of years now - the USD$ and the Japanese Yen.
iii) This is a good thing because the US is running an enormous trade deficit. A weaker $ will reduce this deficit.
iv) The US$ is also losing out from its 'reserve currency' status as Asian Central Banks have started to buy euros as well as $$.
v) The UK has an inflation problem. RPI is nearly 5% (the highest since 1991) and Mervyn King now has to write a letter to the Chancellor explaining how this happened on his watch. This will inevitably lead to higher rates and a slower economy. This is far more important than the level of $/GBP.
Or has my memory warped with time?
Yes, completely. It was to resist the Bundesbank desire for Britain to DEVALUE within the ERM which was logical, and instead to fight to retain parity with the D-Mark after German Unification when the D-Mark needed to REVALUE upwards.
The Tories could not bear to have "devaluation" on their charge sheet so spent a fortune resisting the inevitable.
The Us has the world's biggest trade deficit; followed by Britain.
The Dollar will crash first....then Sterling...then interest rates will climb and climb
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