http://www.telegraph.co.uk/finance/c...-continue.html
By Roger Bootle
A lot of people have been saying that we are heading for a good old-fashioned sterling crisis. Some foreign investors are even holding off from buying British assets for fear of a large fall in the pound. Hello! Where have you been? We have already had a sterling crisis – except that it hasn't been a crisis.
The time to have been seriously worried about the pound, and for foreigners to hold off from buying British assets, was a year ago – when hardly anyone was worried about it. The fact taxi drivers have started to talk obsessively about the exchange rate is the surest sign yet that the bird has flown.
The changes against individual currencies are startling. Since the beginning of the credit crisis 18 months ago, the pound has slumped by 25pc against the dollar, 30pc against the euro, 30pc against the Swiss franc and 45pc against the yen.
In November of last year, the pound could buy you 2.11 dollars. Now, on a good day, it will just about get you 1.50. The pound has not been this low against the greenback since June 2002. More importantly, for those heading across the Channel to ski this winter, the pound will barely buy you one euro. It has never before been this weak against the single currency. In July last year, the pound would have bought you 1.50 euros.
Against a basket of currencies, in which each currency is weighted according to its importance in determining our trade flows, the pound is down by 27pc from its peak seen in July 2007. This fall has abruptly brought to an end a 10-year period during which the pound was incredibly stable at almost exactly the same average level as that seen during the pound's sojourn in the ERM from 1990 to 1992. Interestingly, measured against this basket, the pound has now fallen to a level similar to that seen after it left the ERM.
So what happens next? The taxi drivers' view is full of easy certainty. The pound is bound to go down, isn't it? Well, isn't it? No, it isn't. As a matter of fact, on this occasion I do not have a very strong view one way or the other. The historical record shows that most of the time it is incredibly hard to know in which direction currencies are going to move, never mind how far they will go, or when. Indeed, a study conducted some while back by the Bank of England concluded that anyone wanting to know whether an exchange rate was going to go up or down would be better off flipping a coin than listening to what economists have to say. I doubt whether the taxi drivers are any better.
On a few occasions a currency is so over- or under-valued that it is possible for an economist to make a strong call. Even then, he often has to wait a long time for the forecast to come right. Over much of Labour's term since 1997, it has been plain to see the pound was overvalued. And those of you with good memories will remember me saying as much. Similarly, when we were in the ERM the direction of risk was pretty clear. But now? At last, the pound is close to fair value. From where it currently stands, it could as easily rise as fall. And, for what it is worth, my instinct is that the former is more likely than the latter.
Admittedly, there are powerful economic forces which could push it lower. After all, who would want to buy pounds when interest rates in the UK are heading to zero, when government borrowing will rise to levels never seen before and when the Bank of England may have to resort to heating up the printing presses to reflate the economy?
But show me an economy that isn't in danger of having all this happen. Interest rates in the US have already fallen to zero and its central bank is already deploying unconventional monetary policy. And even the Swiss, whose currency is usually regarded as the safest around, are already pursuing radically expansionary monetary policies.
That said, at the moment, on these grounds the euro looks like the place to be. It is hard to see the perennial inflation worriers in the ECB's Frankfurt headquarters readily embarking on policies that are tantamount to printing money. In that sense, the euro could be the main beneficiary of the credit crisis.
But how long can this last? The strong euro will have major consequences. It is well-known that the eurozone is the UK's largest export market. It is less well-known that the UK is the eurozone's largest export market. The rise of the euro against the pound is making the eurozone's exports much more expensive and our own much cheaper. Never mind what will be happening to trade with the dollar bloc. In time, this will be positive for growth in countries, including the UK, trading with the eurozone, and negative for growth in the eurozone. Given all this, it is hard to see the euro continuing to strengthen. At some point, as the eurozone economy comes under serious pressure, its policymakers may be forced to relax and the euro could easily fall back – even against the pound.
This may seem incredible given the extent of the present selling pressure against sterling. At the moment, euro parity seems to have an irresistible allure. But history shows that the pound can swing from being the currency that no one wants to hold to the one that people can't get enough of in surprisingly short periods of time.
For instance, in 1976, in the midst of a severe economic crisis which saw the UK going cap in hand to the IMF for a bailout, the pound fell very sharply from $2 to $1.50. But just a year later, the pound was in massive demand, surging back towards $2. The Bank of England had to intervene and sell pounds in the foreign exchange markets to keep it down.
Again during the mid 1980s, the pound fell significantly and even came close to hitting parity against the dollar. Just as everyone got jittery about that prospect, it bounced back sharply, rising by almost 50pc to hit 1.50 a little over a year later.
I am not forecasting that something similar will happen over the next year against the euro, but if it did, it would not altogether surprise me. Unless there is a fundamental mispricing, when it comes to currencies the wisest thing to do is to admit that we simply do not know. Anyone who pretends otherwise is either a knave or a fool.
By Roger Bootle
A lot of people have been saying that we are heading for a good old-fashioned sterling crisis. Some foreign investors are even holding off from buying British assets for fear of a large fall in the pound. Hello! Where have you been? We have already had a sterling crisis – except that it hasn't been a crisis.
The time to have been seriously worried about the pound, and for foreigners to hold off from buying British assets, was a year ago – when hardly anyone was worried about it. The fact taxi drivers have started to talk obsessively about the exchange rate is the surest sign yet that the bird has flown.
The changes against individual currencies are startling. Since the beginning of the credit crisis 18 months ago, the pound has slumped by 25pc against the dollar, 30pc against the euro, 30pc against the Swiss franc and 45pc against the yen.
In November of last year, the pound could buy you 2.11 dollars. Now, on a good day, it will just about get you 1.50. The pound has not been this low against the greenback since June 2002. More importantly, for those heading across the Channel to ski this winter, the pound will barely buy you one euro. It has never before been this weak against the single currency. In July last year, the pound would have bought you 1.50 euros.
Against a basket of currencies, in which each currency is weighted according to its importance in determining our trade flows, the pound is down by 27pc from its peak seen in July 2007. This fall has abruptly brought to an end a 10-year period during which the pound was incredibly stable at almost exactly the same average level as that seen during the pound's sojourn in the ERM from 1990 to 1992. Interestingly, measured against this basket, the pound has now fallen to a level similar to that seen after it left the ERM.
So what happens next? The taxi drivers' view is full of easy certainty. The pound is bound to go down, isn't it? Well, isn't it? No, it isn't. As a matter of fact, on this occasion I do not have a very strong view one way or the other. The historical record shows that most of the time it is incredibly hard to know in which direction currencies are going to move, never mind how far they will go, or when. Indeed, a study conducted some while back by the Bank of England concluded that anyone wanting to know whether an exchange rate was going to go up or down would be better off flipping a coin than listening to what economists have to say. I doubt whether the taxi drivers are any better.
On a few occasions a currency is so over- or under-valued that it is possible for an economist to make a strong call. Even then, he often has to wait a long time for the forecast to come right. Over much of Labour's term since 1997, it has been plain to see the pound was overvalued. And those of you with good memories will remember me saying as much. Similarly, when we were in the ERM the direction of risk was pretty clear. But now? At last, the pound is close to fair value. From where it currently stands, it could as easily rise as fall. And, for what it is worth, my instinct is that the former is more likely than the latter.
Admittedly, there are powerful economic forces which could push it lower. After all, who would want to buy pounds when interest rates in the UK are heading to zero, when government borrowing will rise to levels never seen before and when the Bank of England may have to resort to heating up the printing presses to reflate the economy?
But show me an economy that isn't in danger of having all this happen. Interest rates in the US have already fallen to zero and its central bank is already deploying unconventional monetary policy. And even the Swiss, whose currency is usually regarded as the safest around, are already pursuing radically expansionary monetary policies.
That said, at the moment, on these grounds the euro looks like the place to be. It is hard to see the perennial inflation worriers in the ECB's Frankfurt headquarters readily embarking on policies that are tantamount to printing money. In that sense, the euro could be the main beneficiary of the credit crisis.
But how long can this last? The strong euro will have major consequences. It is well-known that the eurozone is the UK's largest export market. It is less well-known that the UK is the eurozone's largest export market. The rise of the euro against the pound is making the eurozone's exports much more expensive and our own much cheaper. Never mind what will be happening to trade with the dollar bloc. In time, this will be positive for growth in countries, including the UK, trading with the eurozone, and negative for growth in the eurozone. Given all this, it is hard to see the euro continuing to strengthen. At some point, as the eurozone economy comes under serious pressure, its policymakers may be forced to relax and the euro could easily fall back – even against the pound.
This may seem incredible given the extent of the present selling pressure against sterling. At the moment, euro parity seems to have an irresistible allure. But history shows that the pound can swing from being the currency that no one wants to hold to the one that people can't get enough of in surprisingly short periods of time.
For instance, in 1976, in the midst of a severe economic crisis which saw the UK going cap in hand to the IMF for a bailout, the pound fell very sharply from $2 to $1.50. But just a year later, the pound was in massive demand, surging back towards $2. The Bank of England had to intervene and sell pounds in the foreign exchange markets to keep it down.
Again during the mid 1980s, the pound fell significantly and even came close to hitting parity against the dollar. Just as everyone got jittery about that prospect, it bounced back sharply, rising by almost 50pc to hit 1.50 a little over a year later.
I am not forecasting that something similar will happen over the next year against the euro, but if it did, it would not altogether surprise me. Unless there is a fundamental mispricing, when it comes to currencies the wisest thing to do is to admit that we simply do not know. Anyone who pretends otherwise is either a knave or a fool.
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