The growing risk of ano-deal Brexit following the appointment of Boris Johnson as prime minister is reflected in sterling.
The UK currency took a hammering last week, falling to two-year lows.
The remarkably incautious remarks from the Bank of England governor Mark Carney, that there was a one in three chance of a recession in the UK next year in the event of a no-deal Brexit did nothing to support the pound.
Neither did his stance that UK interest rates would likely remain at the current level this year.
Mr Cagney’s comments will not have come aswelcome news to Irishexporters who have seen profits slashed on their sales into the UK because of the continued weakness of sterling, nor will his doomsday comments of the outlook for the economy have helped.
By contrast, the UScentral bank delivereda stimulus to the USeconomy, by reducinginterest rates in an effort to offset the gradual slowdown in the global economy.
Federal Reserve chair Jerome Powell’s interest rate adjustment unexpectedly helped to strengthen the dollar, which hit a two-year high last week against the euro. On the plus side, a strong dollar is a gift toEurope, which needs a stimulus and has little room for manoeuvre by way ofreduction in interest rates, currently already on the floor.
In an ideal world, Irish exporters in line with trading partners across the eurozone, need a strong dollar as well as a strong sterling to bolster price competitiveness on global markets.
Of course, this is a two-way sword and both Mr Johnson and President Donald Trump would like to see a weaker currency to help their own exporters.
In Mr Trump’s case, a sharp fall in central bankinterest rates should pull down the strength of the dollar and give support to his trade war against China, hence his caustic comments that the Federal Reserve did not go far enough last week.
A weak dollar would of course increase the cost of imports from China and could eventually sort out the trade imbalance, without the need for a tariff war.
However, the US president is not prepared to wait on further action by the Federal Reserve and once again has decided to go it alone with his surprise threat to impose a 10% import tax on €270bn in Chinese imports, from the start of September.
This would add to the 25% tariff on Chinese imports already in place, effectively hitting all imports of Chinese goods into the US.
The reaction from Beijing has been characteristically muted, but will inevitably be forthcoming and could move into currency warfare.
A sliding currency could help China’s huge export industry cope with new UStariffs, as it makes Chinese products cheaper for buyers who pay in dollars. That could in turn boost an economy that posted its slowest growth rate in nearly two years in the second quarter. Unlike the dollar or euro, the yuan does not float freely against other currencies.
Instead, China’s central bank helps guide the currency by setting a daily trading range. In a currency war, the Chinese authorities will have more freedom to act and hence the upper hand against a US administration which cannot dictate to the Federal Reserve how it supports the dollar.
There was trepidation in Brussels that the EU would be next in the US presidents cross-hairs.
But, the equally surprising move last week by Mr Trump in supporting the signing of the US-EU trade deal that would allow more US beef into Europe was met with a sigh of relief that the bullet has been dodged of a potentially damaging trade war over motor vehicle exports to the US.
The Irish Farmers Association need not worry on its impact on their trade, asthe total import quota into Europe will not be affected.
The wider issue for Irish trade will continue to be how currency exchange rates will be affected by ano-deal Brexit, the US-China trade war and the related interest rates moves by central banks in Europe, the UK and in the US.
But for now, it is pointing towards continued low-interest rates.
- John Whelan is managing partner of the trade consultants, the Linkage-Partnership