David Prosser: Rumours of the pound's demise were premature

Sterling's strength is cushioning usagainst the upwards spike in the dollar oil price
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The Independent Online

So what does Standard & Poor's know anyway? Less than a fortnight after the ratings agency singled out the UK for a possible credit rating downgrade following the next election, sterling is valued more highly than at any time since last November. It is strong against both the dollar and the euro, and getting stronger all the time.

Could it be that international investors do not regard the UK with quite the same concern as S&P? Well, it's worth remembering that S&P always said it was only raising the possibility that a downgrade might occur if the next Government failed to get on top of the public finances – any cut in our rating would, therefore, be unlikely before the end of next year at the earliest.

Still, perceptions change remarkably quickly: sterling's recovery is a story of how what markets think about risk has changed. Our banking sector does, mercifully, seem to have stabilised, and lending is beginning to normalise, which is doing wonders for the way in which the risk of investing in this country is being perceived.

For hard-pressed companies both small and large, it may be difficult to believe that lending markets are thawing. Many continue to find their banks are being exceptionally difficult about credit.

Unfortunately, however, lending does tend to contract during a recession, as banks seek to protect themselves from the fall-out of businesses' difficulties. Since we have been going through a credit crunch, we assume that every instance of a bank raising interest rates, cutting overdraft limits or refusing to lend is a symptom of that crisis. In fact, it may just be old-fashioned recession-proofing.

In fact, everywhere you look, from a top-down view at least, lending markets are becoming easier. For consumers, loans to finance house purchases are increasingly slowly but surely, with the biggest lenders beginning to relax their criteria. For corporates, markets that were more or less shut even a month or so ago are beginning to reopen. Look at the junk bond refinancing – worth $650m – successfully got away by Virgin Media yesterday, for instance.

These trends are driving a reappraisal of the relative risks of asset classes. While the crisis was in full swing – and for some time thereafter – investors flocked to the dollar, the world's safe-haven currency. Now we are back in more normal times, the flight to quality is no longer so prevalent (and the perception of the actual quality of the US is, in any case, being questioned).

Happy days then? Well, not quite.

A weak currency is a symptom of a weak economy, as the Conservatives never tired of saying when sterling came ever close to parity with the euro earlier this year. The recovery of the pound is, then, a welcome sign that the UK may not be quite the basket case it seemed recently. But sterling's gains aren't going to do much to help our embattled manufacturing sector – which still accounts for 15 per cent of the economy, remember – hawk their wares around the world.

That's doubly frustrating in that when the pound was at its lowest, there were few takers for our goods from other struggling countries. As the global economy bottoms out – and, in time, recovers – takers will find goods have become more expensive.

Still, there are upsides. Sterling's strength is cushioning us to some extent against the remarkable upwards spike in the dollar oil price. And remember how worried everyone was about the inflationary consequences of the low value of sterling. At least some of those fears should ease, which is handy given the worry that quantitative easing also has inflationary consequences.