Jeremy Warner's Outlook: Just quit worrying about the dodgy dollar

Click to follow

Only 29 shopping days left to Christmas. If you are a high spender, there has rarely been a better time to hop on a plane to New York for a weekend's shopping.

Only 29 shopping days left to Christmas. If you are a high spender, there has rarely been a better time to hop on a plane to New York for a weekend's shopping. Even when the dollar is strong, the price of goods and services is generally cheaper in the US than it is here, but with the greenback now in seeming free fall, the difference is beginning to look silly. Depending on how much you spend, the savings ought easily to cover the cost of the ticket.

Since George Bush was sworn in as President in January 2001, the dollar has slumped by a stomach churning 30 per cent against the euro. Its performance against the pound has scarcely been much better, with a fall of around one-fifth. The two-dollar pound, a rate of exchange not seen since the early 1990s, and before that the early 1980s, beckons again.

The immediate cause of yesterday's fresh plunge in the dollar was the news that Russia may dump the dollar in favour of the euro as its main foreign currency reserve. But the markets don't need much prompting these days. The long-anticipated correction is now well under way. Once these things start, it is hard to stop them.

The Bush Administration's stance so far has been one of benign neglect. It preaches the virtues of a strong dollar but reasonably insists that there's no point in trying to buck the markets. Foreign exchange intervention has all but been ruled out. Eventually, there will be some sort of Plaza accord type statement from the G7 nations, saying words to the effect that the dollar depreciation has gone quite far enough, thank you very much much, yet it is not clear these things have the same effect as they once did. If the fundamentals don't support the case, the markets will just bluntly ignore it.

Nor is it apparent that the Bush Administration even wants to reverse the fortunes of the declining dollar. By making imports more expensive and exports more competitive, a weak dollar helps to ease America's burgeoning current account deficit and support US employment. Yet there are plenty of commentators who predict the process will end in a nasty road crash for the world economy. There will be a reckoning, we are warned, rather in the way the Asian crisis was once gleefully hailed as the final reckoning, and when that proved not to be the case, it was the Russian debt crisis. When that too proved not to be the case, it was the stock market crash, and when even that proved unequal to the task of poleaxing the world economy, it was September 11 and Iraq. Somehow, we've managed to survive all these calamities. There's been no final reckoning, unless you count the quite mild recession which engulfed the US in 2001/2.

My hunch is that neither the end of the housing boom - the other spectre cited by the gloomsters - nor the falling dollar will trigger the final reckoning either. The doomsday case is easily enough made. In this scenario, foreign investors lose all faith in dollar assets and the decline of the greenback turns into a rout. Interest rates rise sharply to choke off the consequent inflation and support efforts to fund the budget deficit. Demand collapses and America, for so many years the engine room of world economic growth, plunges everyone into recession or worse.

Yet there is a much less worrying, and my view more plausible outcome. In this instance, foreign investors never entirely lose their fascination with dollar assets and prove happy to continue funding a quite sizeable current account deficit. When you think about it, they have every possible incentive to do so. America's trade imbalance is in any case largely with the Far East, not Europe. America pays for its imports in dollars. No exporter to the United States is benefited by a collapse in the dollar, which is why the "adjustment" against Far Eastern currencies has so far been far less severe than against the euro.

As America slowly comes to grips with its twin deficits, there are bound to be some possibly quite serious short-term financial crises. The path is unlikely to be smooth. But the idea that the declining dollar will prompt a depression inducing final reckoning looks misguided. Economists love to speculate on the potential for disaster. Sometimes it is best just to stop worrying.

Latin invasion

The operator of Luton airport, TBI, has finally landed one of its many suitors. The buyer, Abertis, has been wafted here not from paradise but Spain where it is keen to reduce its dependence on toll roads and prepare itself for the day when the Iberian peninsula's airports are thrown open to private operation too.

For TBI's long-suffering shareholders the £551m the Spanish are paying represents a decent premium and it could even provoke a bidding war. Importantly for the TBI board, the 92.5p being offered is also more than Vinci of France were prepared to pay four years ago. That deal slipped through TBI's fingers after it overplayed its hand by first rejecting the bid and then watching its share price melt after the planes flew into the twin towers. It quickly reversed its recommendation but by then Vinci had already taken off back to Paris, citing force majeur.

TBI's chairman and founder Stanley Thomas, who made his pile out of meat pies before moving into property development and then airports, will clear £50m from the deal. Its chief executive, Keith Brooks, who spent years with Price Waterhouse auditing those meat pies before joining Mr Thomas at TBI, will also do nicely, picking up £4m from shares and options. Not bad for a business once lampooned for operating at the cheap and cheerful end of the charter airline market.

It is the low-cost airlines such as easyJet and Ryanair which have transformed the fortunes of Luton and attracted the Spanish, who can see a day when the airport handles 30 million passengers a year - making it the same size as Gatwick is today. The capital investment which goes with that sort of expansion requires a bigger balance sheet than TBI will ever have and if there is one thing the Spanish do not seem to be short of at the moment it is cash.

Abertis says it wants Mr Brooks and his executive team to stick around but the urge to go off and count their pound notes must be strong indeed. In any event, as Banco Santander's purchase of Abbey shows, it is not quite the same becoming the branch manager of a business run from Madrid. Two of the old Abbey board lost their jobs yesterday and it has got to be a decent bet that Mr Brooks will take off from TBI before too long.

WH Smith handover

The pun is impossible to avoid. Richard Handover has finally been persuaded to handover the chairmanship of WH Smith to Robert Walker, a man virtually unheard of outside the arcane world of water utilities. After all the other names that have been in the frame - from Allan Leighton of Asda fame to Sir John Parker of National Grid Transco - to appoint the chief executive of Severn Trent, fresh from allegations of a £75m discrepancy in his accounts, seems a bit of a letdown though, to be fair, he had been with Pepsi for 20 years before turning up at Severn Trent.

Why the search for a new chairman took so long is anyone's guess, as Mr Walker is on the board of Signet with Walker Boyd, an existing WH Smith non-executive director. Given the connection, the executive search undertaken hardly looks to have been necessary. It is only possible to surmise that Mr Walker cannot have been first choice. This isn't altogether surprising. Despite its status as a household name, WH Smith is today no more than a medium-sized company, and one, moreover, which is still struggling to find its niche on the high street.

Still, unproven though Mr Walker might be, he cannot be any worse than Mr Handover, whose performance as chief executive of WH Smith prior to becoming chairman was disastrous. Despite this, Mr Handover walks away with a £5m pension pot, worth nearly £300,000 a year. Not bad for nearly destroying the company.