Falling dollar puts markets under pressure

The impact of the falling greenback was felt around the world this week as the pound soared towards the magical two dollar level.

The impact of the falling greenback was felt around the world this week as the pound soared towards the magical two dollar level.

Sterling hit a peak of 1.9754 US dollars – its highest level since it crashed out of the European Exchange Rate Mechanism (ERM) on Black Wednesday in 1992.

The pound is now within touching distance of two US dollars for the first time since just before Black Wednesday, although the last time in traded constantly above that level was in 1975. The pound fell from 4.20 US dollars in 1945 to 1.10 US dollars in 1985.

The recent surge was good news for British shoppers heading to New York and other US cities for a Christmas spending spree and it also meant firms importing goods into the UK got more for their money.

But it was the nightmare scenario for companies reliant on exports to the US and a strong dollar to prop up earnings.

The US accounts for 15% of exports from the UK – considerably less than the 51% of business done with the European Union but enough to rock the stock market in London this week.

The falling dollar has left policymakers on both sides of the Atlantic pondering the next move for interest rates as higher base rates tend to strengthen a currency by making investments in that denomination more attractive.

F&C fund manager Ted Scott said: “We have seen 17 successive rises in US interest rates in a relatively short space of time but the futures markets are now expecting the next move to be down.

“This has undermined the strength of the dollar and its decline has gathered momentum and led to the recent turmoil in global currency markets.”

The New York Post reported that the depressed dollar was turning Fifth Avenue into a “virtual flea market” for European visitors.

British bargain-hunters can pick up a top of the range 80GB video iPod, which holds 20,000 songs and up to 100 hours of video, for just £180 (€268) at the trendy Apple Store compared with £259 (€385) on the UK high street.

There are also great savings to be made on clothes, and if they cost less than 110 US dollars they are not subject to New York City’s 8.375% sales tax.

A pair of classic Levi 501 men’s jeans costs just 35 US dollars, or less than £18 (€27), in Macy’s pre-Christmas sale, compared with £60 at Debenhams.

But the falling dollar has caused turbulence in global stock markets in recent sessions and the FTSE 100 Index has come under particular pressure with more than 40 of the UK’s largest companies making at least 20% of their sales in North America.

Financial Times publisher Pearson relies heavily on its fast-growing education textbook arm in the US, with North America accounting for two-thirds of group sales. Shares have fallen 3% this week.

And shares in drugs company AstraZeneca, which takes 52% of its revenues across the Atlantic, have dropped 2%.

The Footsie fell from 6254 on November 16 to 6025 on November 28 as investors were spooked by the falling greenback, although the market has risen slightly since then.

Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said currency movements “appear to be underlying current stock market declines”.

“However, the major underlying concern is likely to relate to future interest rate movements,” he added.

“US interest rates – despite recent steadfast comments from the Federal Reserve – could be heading downwards given recent weak economic data, whilst the UK and European Central Bank’s next moves look likely to be up.”

Sterling’s surge against the dollar could also dent City bonuses for London-based bankers working for Wall Street firms as many bonuses are calculated in dollars and converted to the local currency when they are paid.

The dollar has come under pressure from the prospect that the Fed will cut interest rates to boost the ailing economy and reverse the current housing slump.

Economic data from Chicago this week showed business activity was at its lowest level since April 2003, overshadowing stronger-than-expected economic growth figures.

Martin Slaney, head of spread betting at GFT Global Markets in London, said: “The double whammy for stocks is that not only will this data reignite fears of an impending recession, it will also add further momentum to the sell-off in the dollar, thus turning the screw on exporters to the US.”

A cut in US interest rates is likely to coincide with an increase in rates in the UK and Europe, making the pound and euro even more attractive against the dollar.

However, there are those who believe that the White House will be happy to see the dollar weaken further as it could give a much-needed boost to its own export market.

That could do the economy some good by helping to reduce the country’s huge trade deficit – the difference between what the US spends on imports and what it sells in exports – which is currently around 7% of GDP.

Indeed, many economists believe an adjustment is needed to correct a situation where the world’s largest economy imports 50% more than it exports.

But if the dollar sinks too far, the Fed may be forced to raise interest rates just to offer it support – threatening growth in an already weakening economy.

In Europe, the European Central Bank (ECB) has raised rates five times since last year to 3.75% and further rises could see it converge with falling interest rates in the US.

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