Will
The Tumbling Dollar Start
An Economic Whirlwind?
By Philip Thornton
02 December 2006
The
Independent
Transatlantic
travellers hoping to cash in on a $2 pound for the first time in 14
years should enjoy the good times while they last, because a tumbling
dollar could start an economic whirlwind.
Sterling hit its highest
level against the dollar since September 1992 for the second day in
a row, with little sign of obstacles to the magic $2 level. At one point
yesterday a pound was worth $1.9848 on the open market.
"Two dollars is a certainty,"
said Neil Mellor, a currency strategist at the Bank of New York office
in London. He said the crucial test would be $2.002, its peak the pound
reached on 9 September 1992 before its ejection from the exchange rate
mechanism on Black Wednesday. "If it does, there's a possibility
it would catapulted up and there's a lot of space for it to rise,"
he said.
Last Christmas, the pound
was languishing at $1.80 so those iPods, Hugo Boss suits and Manolo
Blahnik shoes will feel 10 per cent cheaper. Back in the UK shoppers
might expect to see cheaper clothes and electronics goods as the prices
of imports from the US and countries whose currencies are tied to the
dollar, such as China, fall. Some companies too will benefit as they
pay less for a host of raw materials including oil and wheat, which
are priced in dollars.
But these short-term benefits
- which will shared by UK - may well be outweighed by the short-term
costs of strong pound - and the danger that the fall in the dollar could
presage a major economic shock that would reverberate around the world.
Sterling's rally to 14-year
highs against the US dollar is a significant threat to Britain's strong
corporate earnings and economic growth rates, experts warn. Just as
exports to the US and China are cheaper, so imports from the two industrial
powerhouses will become more expensive.
"A strong exchange rate
makes UK exports more expensive and UK firms could see sales into the
dollar area negatively affected by the strength of the pound,"
said Chris Iggo, senior strategist at AXA Investment Managers.
The EEF, a manufacturing
lobby group, warns that a sustained $2 pound will see a lot more companies
suffering. The screw will be tightened further if the Bank of England
raises interest rates again in February - its third in seven months
- which support the pound and make borrowing more expensive.
But the fact is that the
sharp rise in the pound - up 14 per cent against the dollar this year
- is not a vote of approval for the UK economy but a damning verdict
on the outlook of the world's largest economy by experts in the financial
markets.
The dollar has been falling
for much of this year but has taken a nosedive in the past few weeks,
losing 4 per cent against the euro in the past month alone.
Experts have been warning
that the US and the dollar have been living on borrowed time. Non-stop
spending by US households has delivered a record trade and current account
deficits. The dollar has held up because overseas investors, especially
the Chinese and other Asians governments are keen to buy dollar assets.
But recent comments by the
Chinese central bank about the need to move into other currencies helped
trigger the start of the dollar's recent slump a week ago. Private investors
have also be keen to buy into US Inc but the prospect of further falls
in the dollar could encourage them to cash in their chips now, pushing
the dollar down further and creating a vicious cycle.
In its most recent forecast
the International Monetary Fund (IMF) warned that if that happened there
would be a "disorderly unwinding" that would see a rapid fall
in the dollar, volatile movements in the financial markets and a "significant
hit" to the world economy. A weak dollar would put up the prices
of imports, discouraging Americans from spending. It would ALSO drive
up inflation and force the US Federal Reserve to raise interest rates.
That could transform its stagnant housing market into a financial disaster
zone. A consumer-led recession would hit those countries that have done
well by selling to Americans.
According to the old adage,
if the US sneezes, the rest of the world catches a cold; if the US succumbs
to a cold then the rest of the world will get the flu.
Yesterday stock markets fell
across the world as fears of a US slowdown stoked worries over the economic
outlook.
While on Wall Street the
Dow Jones index was down 40 points or 0.35 per cent, stock markets in
Germany, France and Spain were all down more than 1 per cent and in
London the FTSE 100 dropped 0.5 per cent
"The strong sterling
will strengthen the headwinds for the UK economy as UK exporters take
a direct hit and the consumer spending, the main driver of the UK economy,
will come under further pressure," said Ted Scott, a UK equities
fund manager at F&C.
The IMF yesterday declined
to comment further. However after five years of issuing warnings over
the dollar and the global imbalances, the IMF is taking action. It has
launched multilateral talks to allow big players such as the US and
China to talk frankly in private about the possible ways to reduce these
imbalances without triggering the market reaction they dread.
Transatlantic travellers
hoping to cash in on a $2 pound for the first time in 14 years should
enjoy the good times while they last, because a tumbling dollar could
start an economic whirlwind.
Sterling hit its highest
level against the dollar since September 1992 for the second day in
a row, with little sign of obstacles to the magic $2 level. At one point
yesterday a pound was worth $1.9848 on the open market.
"Two dollars is a certainty,"
said Neil Mellor, a currency strategist at the Bank of New York office
in London. He said the crucial test would be $2.002, its peak the pound
reached on 9 September 1992 before its ejection from the exchange rate
mechanism on Black Wednesday. "If it does, there's a possibility
it would catapulted up and there's a lot of space for it to rise,"
he said.
Last Christmas, the pound
was languishing at $1.80 so those iPods, Hugo Boss suits and Manolo
Blahnik shoes will feel 10 per cent cheaper. Back in the UK shoppers
might expect to see cheaper clothes and electronics goods as the prices
of imports from the US and countries whose currencies are tied to the
dollar, such as China, fall. Some companies too will benefit as they
pay less for a host of raw materials including oil and wheat, which
are priced in dollars.
But these short-term benefits
- which will shared by UK - may well be outweighed by the short-term
costs of strong pound - and the danger that the fall in the dollar could
presage a major economic shock that would reverberate around the world.
Sterling's rally to 14-year
highs against the US dollar is a significant threat to Britain's strong
corporate earnings and economic growth rates, experts warn. Just as
exports to the US and China are cheaper, so imports from the two industrial
powerhouses will become more expensive.
"A strong exchange rate
makes UK exports more expensive and UK firms could see sales into the
dollar area negatively affected by the strength of the pound,"
said Chris Iggo, senior strategist at AXA Investment Managers.
The EEF, a manufacturing
lobby group, warns that a sustained $2 pound will see a lot more companies
suffering. The screw will be tightened further if the Bank of England
raises interest rates again in February - its third in seven months
- which support the pound and make borrowing more expensive.
But the fact is that the
sharp rise in the pound - up 14 per cent against the dollar this year
- is not a vote of approval for the UK economy but a damning verdict
on the outlook of the world's largest economy by experts in the financial
markets.
The dollar has been falling for much of this year but has taken a nosedive
in the past few weeks, losing 4 per cent against the euro in the past
month alone.
Experts have been warning
that the US and the dollar have been living on borrowed time. Non-stop
spending by US households has delivered a record trade and current account
deficits. The dollar has held up because overseas investors, especially
the Chinese and other Asians governments are keen to buy dollar assets.
But recent comments by the
Chinese central bank about the need to move into other currencies helped
trigger the start of the dollar's recent slump a week ago. Private investors
have also be keen to buy into US Inc but the prospect of further falls
in the dollar could encourage them to cash in their chips now, pushing
the dollar down further and creating a vicious cycle.
In its most recent forecast
the International Monetary Fund (IMF) warned that if that happened there
would be a "disorderly unwinding" that would see a rapid fall
in the dollar, volatile movements in the financial markets and a "significant
hit" to the world economy. A weak dollar would put up the prices
of imports, discouraging Americans from spending. It would ALSO drive
up inflation and force the US Federal Reserve to raise interest rates.
That could transform its stagnant housing market into a financial disaster
zone. A consumer-led recession would hit those countries that have done
well by selling to Americans.
According to the old adage,
if the US sneezes, the rest of the world catches a cold; if the US succumbs
to a cold then the rest of the world will get the flu.
Yesterday stock markets fell
across the world as fears of a US slowdown stoked worries over the economic
outlook.
While on Wall Street the
Dow Jones index was down 40 points or 0.35 per cent, stock markets in
Germany, France and Spain were all down more than 1 per cent and in
London the FTSE 100 dropped 0.5 per cent
"The strong sterling
will strengthen the headwinds for the UK economy as UK exporters take
a direct hit and the consumer spending, the main driver of the UK economy,
will come under further pressure," said Ted Scott, a UK equities
fund manager at F&C.
The IMF yesterday declined
to comment further. However after five years of issuing warnings over
the dollar and the global imbalances, the IMF is taking action. It has
launched multilateral talks to allow big players such as the US and
China to talk frankly in private about the possible ways to reduce these
imbalances without triggering the market reaction they dread.
© 2006 Independent News
and Media Limited
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