Comment: Behind the sterling and dollar upstarts
Tuesday 08 April 1997
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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