Business Comment: Niceties butter no parsnips in forex

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If exchange rates never misbehaved, what would the G7 ministers have left to argue about? Likewise, if the pound didn't interrupt its long-run decline with an appreciation from time to time, what would British exporters be able to blame for their mediocre performance?

The difficulty with exchange rates is that they never please all of the people all of the time. Whenever they move too far in one direction or another somebody is bound to kick up a fuss. There are three separate areas of fuss in the currency markets at the moment, but the paradox is that exchange rates are not far away from what economists would consider to be their equilibrium values. There are no serious mis-alignments.

Take the dollar versus the yen. The US currency has gained more than 50 per cent in value since hitting its post-war low in April 1995. The G7 meeting two years ago marked a successful turning point. Both the Japanese and Americans are indicating that they think the movement has gone far enough.

The US means it; if the dollar climbs even higher, American manufacturers will feel the pinch. It is perhaps surprising that they have not yet started to whine in any serious way. The US trade deficit - and especially the bilateral deficit with Japan - is uncomfortably big. It would be alarming if the strong dollar started to undermine exports.

The Japanese probably do not mean it. Yasuo Matsushita, Governor of the Bank of Japan, made it clear in a speech at the end of last week that the authorities are depending on rapid export gains to sustain the virtuous circle of growth in the limping Japanese economy. Interest rates can't go any lower. The government has to start correcting its huge budget deficit, so taxes are due to rise. A weaker yen is the only weapon left in Japan's armoury.

Japan still feels compelled to make the right noises about halting the yen's fall. But political niceties will butter no parsnips in the foreign exchange markets. Investors will look at the relative strengths of the two economies - the contrast could hardly be greater - and at interest rate prospects. If the authorities tried intervention in these circumstances it would flop. The market is right on this front.

A second aspect of currency tensions is the outlook for EMU. The investing herd has a simple rule of thumb here. Whenever the single currency looks less probable, buy German marks, and vice versa. As the political heat builds up during the next year, there will be several waves of sentiment back and forth.

Beneath these waves, most of the currencies within the exchange rate mechanism will remain as stable as they have for the past five years. The exception, the lira, will be vulnerable to bigger movements unless Italy delivers economic reforms and budget proposals the market finds genuinely credible.

That leaves sterling. There are two contradictory views about the pound's recent advance. You can either believe that it represents a fundamental improvement in the British economy - an improvement based partly on the performance of all those exporters now complaining the loudest about the strong pound.

Or you can opt for the view that it is a temporary gain linked to the dollar and the present mini-boom. On balance the latter case seems more probable. So if you are taking your holiday abroad this summer, this is perhaps the time to be buying your currency.

Some don't like it hot

It's a bit rich of Andrew Regan to complain about the surveillance operation mounted by the CWS against him and his family. This is the man who has prevailed upon senior CWS executives to act in a grossly disloyal way to their organisation. If he can't stand the heat, he should never have entered the kitchen.