The dwindling dollar
9 Dec 07

In today's Sunday Times, David Smith has written a brilliant article explaining the currency movements and its effect on the UK. "The dollar keeps sinking, but as British firm's most important markets are in Europe, the surging euro has given them a boost".

The pound has strengthening against the dollar but it has also been falling against the euro, falling 10% this year.

This could be good news - "Europe is our main export market so the fall against the euro should help, while th rise against the dollar helps to keep commodity prices under control" according to Stephen Radley, chief economist at the EEF.

This could explain the upbeat figures for manufacturing last week, with export orders rising strongly. Exports to the rest of the EU has risen by 7.5% in Q3 and only edged up 0.5% in non-EU.

The euro is expected to strenghten against the pound from 1.31 euros to 1.38. But it may fall in the long term, as the ECB has to face rate cuts due to weaker growth prospects despite attempts to keep inflation under control, which lies very high at 3%.

The fall in the dollar is good for British tourists but bad for British companies exposed to the weak dollar. For Pearson media group, when sterling increases by 5 cents against the dollar, its earnings are hit by about 1p a share.

European companies who have been hit by the strong euro creating problems for their exports have had to hedge the currency, but this only postpones the problem rather than solving it. They have begun to offset the dollar weakness with increased outsourcing.

Links:
Exporters ride swings in currency - The Times (9 Dec 07)