A frown, a smile and a touch of the bulldog spirit

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Industrialists yesterday reacted with a mixture of despondency, delight and old-fashioned British sang froid as the pound continued to trade at dollars 2.

For some, the weakness of the American currency spells falling sales and further pressure on sagging profit margins. But for others it means a sharp reduction in operating costs.

Jaguar, which sells more than 40 per cent of its luxury cars in North America, described the current exchange rate as 'absolutely crippling'. A spokesman added: 'Since 1985 sterling has virtually doubled in value against the dollar. You only have to do a simple piece of arithmetic to see the effect on UK companies trying to export to the US.'

British Steel, which buys most of its raw materials in dollars, will benefit from the pound's strength, however. 'Broadly speaking, the dollar's level is not unhelpful in terms of our operating costs,' a spokesman said. The company is also benefiting from the pound's weakness against the mark since European steel sales are mark-denominated.

Although the fall in the cost of imported raw materials is good for domestic inflation, some industrialists fear that the dollar's slump could deepen the recession by making exports less competitive.

But the overall picture is not clear-cut because of the number of British companies that hedge anticipated dollar earnings, manufacture in and export from the US, and re-invest profits there.

The drugs company, Wellcome, which makes more than half its profits in the US, said each percentage point fall in the dollar reduced profits by pounds 1.5m.

However, Ian Duncan, finance director of Tomkins, the British conglomerate that owns the US gun manufacturer Smith and Wesson, said it was 'looking like a hero' because it had hedged its budgeted US earnings for the next 12 months at dollars 1.76 to the pound.

The growing trend for UK companies to manufacture goods in dollar-denominated areas of the world has helped to insulate them against exchange rate losses. Smiths Industries, the aerospace supplier, can shift production from the UK to the US, for instance, while T&N, the car components supplier, also has big US manufacturing operations.

North America accounts for 18 per cent of pre-interest profits at the drinks group Guinness. It exports whisky to the US but it also ships bourbon from there. In addition, it hedges its US earnings and borrows in dollars.

What unsettles many companies is not so much the dollar's weakness but the violent swings in the US currency that make planning a nightmare. Faced with a 5 per cent decline in the dollar's value in as many days, Jaguar cannot simply increase its US prices by the same amount, partly because it would be impractical and partly because it would lose out to competing luxury car makers.

But the situation for British industry could be worse. In the mid- 1980s the US accounted for a fifth of all UK exports by value. It now accounts for only 11 per cent. Sudhir Junankar, deputy economics director at the Confederation of British Industry, said: 'That suggests the current exchange rate problem is one which is containable, not a crisis.'

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