Comment: Behind the sterling and dollar upstarts

What a delicious irony that it is the prospect of the pound staying out of another European currency arrangement that has finally helped it regain the level it last saw when it was catapulted out of Europe the last time. And how like the topsy-turvy world of the foreign exchange markets to be driving higher the two currencies - the dollar and sterling - which are most in danger of a revival of the inflation which has, in the long term, led to their steady depreciation against the classic strong currencies of this world.

Have things changed so much that we can not expect to hear from now on the word "pound" or "dollar" unqualified by the adjective "strong"? It is certainly true that the Anglo-Saxon economies are buoyant in ways the Germans and Japanese can only dream of at the moment. Even if both of these pick up as expected during the course of 1997, they are not going to catch up to the US or UK. This sterling rally could go much further.

Yet it is too soon to say that the tide of history has turned. The economic fundamentals suggest the opposite, and however long it takes them, the fundamentals tend to win out in the end. Take trade. America's trade is deep in the red already; Britain's soon could be if the unfavourable trends continue, and if the moans of pain from exporters turn out to be true. The underlying trade picture will tend to reverse the pattern of currency appreciation eventually - even if American nerves do not fray sooner, leading the US to bully Japan into efforts to prop up the yen.

The other consideration for future nominal exchange rate levels will be inflation prospects. Here again, the very long-run picture favours the traditional strong currencies rather than the dollar and sterling upstarts. The differences do not look big in a low-inflation world, but the US and UK have higher inflation rates than the other big industrial countries, and more inflationary pressure in the pipeline.

Predicting the direction is one thing, the timing entirely another. Past experience suggests it can take years, as in the early 1980s, for those fundamentals to reassert themselves.

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