Cable Strengthens

This is not a reference to the growing political influence of the Lib Dem economics spokesman, a possible front runner to be the next Speaker of the House of Commons. Instead, it refers to another influential cable - the pound-dollar exchange rate. The pound rose 0.9 per cent today against the dollar to $1.5476, levels last reached in late December.

Sterling is gaining ground largely because FX traders are becoming more optimistic about prospects for a return to growth in the UK economy and the chance that the Bank of England’s ultra-low policy rate strategy allied to £120bn plus of quantitative easing might end sooner rather than later.

An appreciation of the exchange rate at this stage of the economic cycle might be welcome news to tourists looking forward to their jaunts across the Atlantic, but for the UK economy is poses dangers. The fear is that a tentative economic recovery might be stalled by the currency rising and squeezing the UK export sector. Sterling’s depreciation has been an important factor keeping price deflation at bay and a bulwark against a much steeper and damaging slump in manufacturing output. if the prop of a cheap currency is gradually taken away, the chances of a return to something like trend growth will be significantly lower. Keep in mind that the Bank of England allow sterling to float freely in the currency markets - it does not intervene directly to affect the cable rate of sterling against the Euro, Yen, Yuan etc.

Roger Bootle has a piece in the Telegraph about sterling and the economic recovery - a good one for AS and A2 students to read ahead of their exams.

“Our chances of getting a favourable response to the low pound depend not only upon the pound being low now, but on producers believing that it will stay low in the future. If they believe this then it will be worth the effort to build up markets, sales forces and supply chains, and to invest in plant and machinery. If, by contrast, they believe that the weak pound will be a passing phenomenon then they may well think that such investment is not worth the effort and expense.”

More here: “A low pound is essential for the UK’s economic recovery and should be a political priority”