A 50 pence dollar by Christmas. That is what some are predicting as the pound Sterling racks up a second week of gains against the greenback and goes into December sky high. As the Fed lowers its interest rates the Bank of England is going the other way, and its economy goes from strength to strength while America’s slows.
In the last 14 years much has changed. In 1992 the pound was linked to Europe via the ERM, but its strength against the dollar made it uncompetitive in America, so the pound crashed out of the system and was independent again.
Today it is back where it was, but with Europe more important and better underlying economic fundamentals, there is no central bank panic says the Bank of England’s Mervyn King:
“I’ve found life much more difficult in the last six to twelve months whereas in the late 90’s the pressure was the other way around; those companies had no concerns about exporting to the dollar area, it was companies trying to export to the euro area all competing with euro area companies in other third markets that were suffering then. There are swings and roundabouts, and all we can do is think about stability on average”, he said.
Big exporters in dollar terms are feeling pain, and the ozone layer’s likely to suffer from the well-heeled jetting off to New York to spend their christmas bonusses. The dollar’s fall does have victims.
But a strong pound keeps costs down for importers, and with Asian economies taking up the slack in demand, and increasingly holding foreign reserves in non-dollar assets, the simple fact is the dollar is not what it was.