COMMENT: Bankers declare war on the currency dealers
COMMENT: "As things stand, the dollar may retrace the ground that it lost this year against both the yen and the mark. Further gains will be harder to come by"
Wednesday 16 August 1995
The question now is just how far the dollar rally has to go. Already it has gained more than most currency strategists were predicting for weeks, if not months to come. The market now has Y100 yen and DM1.50 in its sights, but there must be considerable doubt over whether the rally can be sustained much beyond those levels.
As we were reminded by a paper published by the Bank of England two weeks ago, foreign exchange markets are more often than not dominated by "epidemics or herd behaviour". Dealers watch what others are doing and copy them if they are successful. It is this feature that the central banks have exploited so successfully in their recent tactics. There are no dealers watched more closely than central banks. Well publicised intervention has clearly convinced traders that there is a lot of money to be lost by betting against the dollar. Dollar weakness has generally been attributed to the US twin budgetary and balance of payments deficits, which have led to a continuous outflow of dollars for so many years. Yen strength has equally been attributed to the Japanese tendency to over-save and to pile up huge surpluses.
In the next year or so, the current account trends look favourable. One of the factors that helped the dollar to strengthen yesterday against the yen was the marked reduction in the Japanese trade balance in July. It had been falling for some time in yen, but because of the appreciation of the yen had been slower to come down in dollar terms. Equally, the US trade deficit is generally expected to fall quite substantially in the months ahead.
The budgetary trends are also more favourable to the US than is generally acknowledged. The US budget deficit is now less than 2 per cent of GDP. There appears to be a real willingness to tackle the deficits that have dogged US public finances since President Reagan cut taxes without commensurate reductions in spending.
Set against this, however, is the long history of dollar depreciation and the doubts that emerged earlier this year about the dollar's long- term future as a reserve currency. As long as the dollar is accepted in this role, there will always be a temptation for the US to consume more than it produces. In the short term, there will also be worries if there is an all-out confrontation this autumn between the Republican Congress and President Clinton over the US budget. Another bearish factor for the dollar is the fact that there is still ample political mileage to be gained from Jap-bashing. In the run-up to the election, the hostility towards Japan that manifested itself in the threatened trade war could again come to the surface. The very strength of the yen may also lead the Japanese to believe they are off the hook, that they can simply carry on with export- led growth in circumstances when they should be energetically deregulating the economy. As things stand, the dollar may retrace the ground that it lost this year against both the yen and the mark. Further gains will be harder to come by.
Dangers on the high-tech trail
MDIS was one of those new issues which had those unlucky enough to believe the hype being peddled by the company's usually reliable City sponsors running for their lawyers. The charge of false prospectus failed to stick. Even so, investors are still seething about being so severely misled. Yesterday the company delivered the coup de grace with its third profits warning since last year's ill-fated flotation.
Hired originally as an archetypal "trophy" chairman designed to bolster the company's credibility, Ian Hay Davison, has been forced into a much more active role. Out goes the chief executive, Jerry Causley, the "visionary" who failed to deliver. Out too goes the company's investment bank, Barings, already in truth well out of it, having unloaded a large part of its stake in the company onto hapless investors during the flotation. Issued at 260p, the shares were yesterday trading at 62.5p.
Whether this is sufficient by way of retribution remains to be seen. Many investors would like to go further but then someone has to stay behind to clear up the mess. Mr Hay Davison believes enough has now been done to make a fresh start and indeed some brokers were cautiously putting the stock back on their buy list after yesterday's fall. None the less, the whole episode is a salutory lesson on the perils of high-technology investment. Those tempted by the feast of high-tech stocks being lined up for flotation on the Alternative Investment Market ignore it at their peril.
Cable still has much to prove
With three of the big cable operators - Telewest, Nynex and General Cable - having now reported interim figures, it is time for a progress report. All are losing big sums, but that is par for the course at this stage of the adventure when the cost of digging up the roads still has the upper hand over revenue-providing subscibers. All have managed to reduce "churn", the rate at which subscribers disconnect from the service, which had been uniformly bad across the UK. Now it is only pretty bad: 30 per cent for General Cable, one of the better-managed operators. All three have also made good progress on their networks.
In sum, all is proceeding as expected. So why do share prices in the sector remain depressed? So poor is the City's appetite for cable that Telewest, by far the biggest player, has apparently decided it will have to raise additional funds in the cable-friendly US to help cut debt and to finance future stages of network-building. In part the problem is cable overload - there have just been too many of these issues. The formula also remains unproven. Cable has been highly successful in the US but Britain is different.
Furthermore, a new long-term threat now looms in the form of competition from digital terrestrial TV: more free or cheap programming alternatives without the need for a satellite dish or a cable connection. While most analysts do not expect much movement on this front before the turn of the century, it remains another negative factor to take on board. In these circumstances a degree of scepticism seems justified. Not until cable begins to show clear signs of better penetration rates, fewer disconnects and faster-growing revenues can these stocks hope for much action.
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