An unfashionable time to be the dollar

If this were the late 1980s we would be waiting for a bout of central bank intervention to boost the dollar. Remember the days of the Louvre Accord of 1987, when the leading industrial countries agreed to hold currencies within unpublished bands, so that if one rose or fell too far their central banks would intervene to push it the other way?

Those days seem long past. The central banks still have their monthly meetings in Basle, the finance ministries still talk to each other at international meetings, but they don't talk much about currencies. The fact that the dollar has been driven down in recent weeks has not provoked the concerned reaction it would have caused five years ago. Does this mean that the central banks are no longer worried? Or will they pounce soon ?

There are two tests which need to be applied to any sudden currency movement for it to become a candidate for intervention. The first is whether the movement is irrational - because if it were justified by the underlying economic situation it would be absurd to try to offset the shift. The second is whether it is likely to destabilise the world economy - if it does not matter too much, the central banks are unlikely to want to become involved.

The best answer to the "Is it rational?" test is "not really". One of the less attractive aspects of market commentators is their ability to create rational reasons why something should have happened when they had previously failed to spot that it might happen. And so they rounded up the usual suspects to explain dollar weakness. These include US financial commitments to Mexico, a perceived (and probably wrong) reluctance of the Fed to move interest rates up much further as the US economy slows, the sharper-than-expected rebound of the German economy (which increases the likelihood of an early increase in mark rates and so increases its relative attraction).

The trouble is, none of these are really credible. The US support for Mexico, whatever it costs, will be modest beside the West German support for the former East Germany. While the US expansion is certainly mature, the economy is going to continue at above-trend growth for at least another six months, which would certainly justify further rises in US interest rates. And as for the "flight to quality" which is supposed to justify putting money into marks rather than dollars, on rational grounds dollars ought to be more secure than any European currency, for there is a possibility that the European currency might disappear in the next five years, whereas there is no such possibility for the dollar.

No, the real explanation is fashion: the dollar is unfashionable. There are times when markets ignore fundamentals and follow their whim. So many people (myself included) have confidently predicted a dollar recovery and been proved wrong, that people have started to lose confidence in their judgement. That is, of course, just the moment when markets turn - when everyone is convinced that they will never do so - but the dollar's recovery has been a long time coming.

The best answer to the "Is it destabilising?" test is "not yet". One could envisage a fall in the dollar which would start seriously to damage world trade, but it would have to be more marked than the present weakness. The experience of living for more than 20 years with fluctuating currencies has made companies much more robust: not only are there many more financial instruments available which enable companies to hedge their exposure; many firms have adapted their structure (for example by setting up assembly plants close to their markets) to render them less vulnerable to currency swings. As a result, the central banks are not yet seriously concerned. There will be a dollar rate which would cause such concern, but it is probably below DM1.40. In any case there is only some point in the central banks using their principal weapon to order the exchanges, concerted intervention, when the markets are already sniffing at a turning point. Intervention only works when it pushes the markets into doing something they wanted to do anyway. A somewhat half-hearted bout of support of the dollar last autumn failed on this score.

All this suggests that the turning point for the dollar, helped maybe by intervention, is some months off. Now, what are the implications for sterling? The pound has been hit by similar worries, and the markets have rounded up the usual suspects. Some of these are political. It is not just that the markets fear that the next UK Government will be led by Labour; it is also that in the run up to the election the Tories will make mistakes. The reality is that no-one knows very much about Labour financial policy, even on fundamental issues such as a single currency.Nevertheless, it would be absurd to deny that the markets are concerned about the direction of UK politics.

In the absence of an early general election there are two things which might change the mood about the pound. The first would be that turning- point for the dollar. The two currencies have tended to move in much the same direction and when the dollar does recover its fashionable status, as it surely will, that will help sterling.

The second is a continued run of good economic numbers. One of the problems at the moment is that the combination of some slight weakness in the pace of economic growth and the more marked weakness of the Government has led to feelings that the authorities will be reluctant to increase interest rates much further. If the economy's performance figures continue to behave and the authorities are prepared to continue their anti-inflationary stance, then fundamentals will reassert themselves. But, do not expect a sterling recovery just yet.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Arts and Entertainment
Jamie Oliver
filmTV chef Jamie Oliver turned down role in The Hobbit
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
Arts and Entertainment
Jeremy Clarkson, left, and Richard Hammond upset the locals in South America
tvReview: Top Gear team flee Patagonia as Christmas special reaches its climax in the style of Butch and Sundance
News
people
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
Arts and Entertainment
Peter Mayhew as Chewbacca alongside Harrison Ford's Han Solo in 'Star Wars'
film
News
i100
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Tracy Emin's 1998 piece 'My Bed' on display at Christie's
artOne expert claims she did not
Arts and Entertainment
Catherine (Sarah Lancashire) in Happy Valley ((C) Red Productions/Ben Blackall)
TV
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Clueless? Locked-door mysteries are the ultimate manifestation of the cerebral detective story
booksAs a new collection of the genre’s best is published, its editor explains the rules of engagement
Sport
Robin van Persie is blocked by Hugo Lloris
footballTottenham vs Manchester United match report
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?