What sterling crash?

10:56 am - October 26th 2008

by Chris Dillow    

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The Tories are trying to blame sterling’s fall on Gordon Brown. And they’re failing. Fraser Nelson writes:

The sterling crash has now begun in earnest. The pound has today (today!) fallen 9% against the Yen and is off 4% against the dollar to a lowly $1.56 with forecasts of $1.40 or lower next year. Against any other currency you may mention, it’s now plunging.

Don’t mention the Aussie dollar: the pound’s near a four-year high against that. And it’s only 1.6% below its six-month average against the euro.

The fact is, sterling is largely a sideshow now. Although its trade-weighted index has fallen 5% in the last month, the majority of its decline happened over the winter. Sterling weakness is an old story. Instead, the story is about the dollar and yen. It’s these that are soaring, not sterling that’s crashing. This is probably because a scramble for cash is forcing investors – perhaps especially hedge funds – to close positions. And as many were short of dollars and yen, so these have risen.
And this is just drivel:

There is a serious prospect that Brown will try and inflate his way out of this debt problem, a prospect which terrifies currency dealers.

If this were a serious prospect, gilts would have sold off along with sterling – inflation is terrible for government bonds. But they haven’t. Indeed, spreads between 10 year gilts and their US equivalents are close to their lows for this year, whilst spreads over 10 year Bunds are an insignificant 0.13 percentage points above their post-2000 average.

Far from being a sign of trouble, sterling’s weakness is actually a help. In making exports and import-substitutes cheaper, it will – with a long lag – help boost profits and economic activity and relieve the recession.

Fraser continues:

I have heard serious people talking about parity with the dollar.

If he knew anything about FX markets, he’d one that the one parity that does exist is the one between the value of an exchange rate forecast and that of a wet fart.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments

1. dreamingspire

In the mid 1990s I was importing professional spec electronic goods from Taiwan, and the trade was in US Dollars. Of course a small business cannot buy FX forward, because it ties up either cash or, more likely, your overdraft facility, so we had to ride the FX market. Did quite well, actually. When the USD fell, Taiwan would put up its prices, but only with a lag. Now, with the USD strong, they will go the other way, again after a lag – but current trading conditions may make them move faster… (Can’t comment on trading with China, as I’m not informed on that.) However, most Christmas goods will already be paid for and delivered to the shops, further insulating us for a while from currency shifts. Don’t panic! (not until after Xmas, anyway)
As for the comments about more public spending, careful study suggests that the intent is not to increase it over the medium term, but to (try to) bring some already approved capital projects forward. What we have not seen is (unlike the mid 70s) any move to fund LAs and Housing Associations to purchase housing units that are not selling – and thus no move to fend off unemployment by getting the house builders back to work. Its the inflated value of land that fuelled the house builders…
Have some sympathy for the scrap dealers (sorry: recycling operators), because the value of scrap steel has gone through the floor.

Is this the same Fraser Nelson who used to write dull (& often inaccurate) pieces in The Scotsman? (maybe he still does? haven’t read it in a while…)

I particularly liked this bit:

“Debt is how Brown governed. It was his dope. It’s the key to understanding the UK economy in the last decade and the reckless nature of Brown’s short-termist policies. Debts are steroids to unscrupulous policymakers as debt-fuelled asset bubbles give a fake feeling of prosperity, which usually translates into votes for the ruling party.”

He has a very short memory, methinks…substituting “Lawson” for “Brown” works pretty well…

Andy – is your point that because this policy failed to work for Lawson, that we should exonerate Brown for trying it? Is Brown not supposed to be awesomely clever and learned? Shouldn’t he have learned the lesson from the historical example you quote?

No, Diogenes, it wasn’t.

I don’t recall mentioning whether or not anyone should ‘exonerate’ Brown (personally I think he should be smacked round the head with a large accountancy textbook for the terrible mess of PFI, but there ya go), his reputed intelligence, or (in)ability to learn from history.

But I thought that was fairly obvious from my post?

“Fraser Nelson’s a tedious plodding hack, who used an argument to attack one politician that does no favours to the political viewpoint he himself espouses.”

sounds a bit more like it to me.

Sorry I couldn’t go into an in-depth analysis of his previous Scottish newspaper output over the last 5 years to support this vicious slur upon his abilities… 🙂

So, “diogenes” (isn’t that just a tiny bit arrogant choice of a pseudonym, hmm?), do you always make knee-jerk assumptions that anyone who criticises right-wing hacks is a Brown fanboy/girl?

Just wondering…

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