Mighty greenback heads into the unknown

Click to follow
The Independent Online
"America is no longer the world's unchallenged economic leader. Japan could overtake it in size by the end of the century, China a few years later. It is not easy to see a reversal of the dollar's trend decline"

Will the dollar ever revive? The question is perhaps easier to answer for the long term than the short. In the short term the dollar looks destined to remain as volatile and unpredictable as ever. Explaining short-term movements in the foreign exchange markets is always a matter of rationalisation after the event, and this is certainly true about yesterday's dramatic fall in the dollar. It took the pundits, who have recently been predicting a short-term revival in the US currency, totally by surprise.

It wasn't until after the normally unremarked weekly jobless statistics were released that dealers were able to say, "ah, so that was the reason".

The slide started slowly in Japan though at that stage it was kept under control by Bank of Japan intervention. The dollar then plunged when European markets opened; moving the currency was easy in quiet Ascension Day trading. Nobody could quite figure it out at that stage, but finally, some 12 hours after the attack began, the explanation finally arrived in the form the jobless statistics and almost equally low-profile figures for existing home sales. What this run of weak economic figures has done is to change the consensus view about where US interest rates are heading. Traders - as opposed to analysts - reckon they will go down rather than up.

The new consensus could well be wrong. It seems more likely that the economy is experiencing a few bumps rather than a hard landing, to use the markets' metaphor of choice. There are, in addition, some inflation alarms ringing. The Fed might see a need to increase interest rates later in the year or early in 1996. In that eventuality speculative money will slosh back, causing a rally of sorts. Whatever happens short term, however, it is hard to make any kind of long-term bull case for the dollar. Dollar assets are unattractive to long-term foreign investors again, with much of the rally in bonds and equities already past and yields relatively low. Central banks are sitting on piles of dollar reserves accumulated through the $40bn-plus of intervention they have undertaken this year. When the exchange rate improves enough for them to sell at a bit of a profit, they will start a trickle of sales to get rid of the stockpile.

Worst of all, however, America is no longer the world's unchallenged economic leader. Japan could overtake it in size by the end of the century, China a few years later. It is not easy to see a reversal of the dollar's trend decline.

European future beckons for MMC

The Monopolies Commission is amateurish in the best sense of the word, in that its inquiries are run largely by part-timers from other walks of life. Should we risk a radical overhaul of such a very British institution?

Amateurishness can in the right circumstances inject common sense from the real world, like a jury of the common people in a criminal court. The MMC has worked well enough for 20 years, so why change it now? Amateurism, unfortunately, can also mean lack of professionalism and eccentricity, which explains some of the commission's inconsistencies.

Why was vertical integration unacceptable in brewing but a similar pattern of restraints cleared for ice-cream retailing? Some of its reports have been very good, but others, such as the investigation of the fragrances industry, have not.

The Commons trade and industry select committee, which published a report on competition policy yesterday, would like to see the MMC merged into the Office of Fair Trading as a single agency. The argument against a single body is that it would mix up the prosecution function of the OFT with the quasi-judicial role of the MMC. The convincing case for integration is that - given suitable internal safeguards - a single full-time competition agency would reduce duplication of effort for both companies and bureaucrats and lead to more consistent and faster decisions.

This, however, is a minor issue compared with the consequences of the switch, favoured by the committee, to what competition specialists like to call a European-style "prohibition" approach to monopolies law.

The effect would be for the law to define in advance what is illegal and the competition agency would fine those who breach the rules. At present, it takes an investigation to decide the rights and wrongs, after which a practice can be banned. The full weight of the law therefore tends to operate only on repeat offenders.

If the bureaucracts gain more power, how can they be made accountable? Most suggestions revolve around using the courts for appeal, but this will be time-consuming and expensive. The committee favours a compromise in which the courts play a role, but ministers remain responsible for big decisions that affect the structure of an industry - such as the beer orders whose effects are still being felt in the brewing and pub businesses.

This is one of the committee's better reports, and its ideas might work. However, the chances of this government acting on them seem remote. Try telling a Eurosceptic Tory in a government with a slim majority that we need to reshape our competition policy on German, Italian and Brussels lines. Labour, however, is moving rapidly towards something like the committee's proposals.

When statistics don't add up

Viewed from the heights of the CBI's headquarters in Tottenham Court Road, manufacturing is buoyant with the balance of companies expecting output to rise at very high levels. Viewed by the Government's statisticians who work out just how much output is being produced, manufacturing has stalled. Back to the CBI: export order expectations in May remain at their most positive for 18 years. Not so, says the Central Statistical Office: exports are stagnating and the trend for the volume of exports is down.

If the CSO is right, then the economy is in serious trouble, with manufacturing weakness exacerbating the fragility of the high street and the housing market. If the CBI is right, then the strength of manufacturing will compensate for the sluggish growth of consumption, and growth will be sustained.

In the past, the CBI's qualitative survey of companies' views has generally moved in tandem with the official figures for production. But for the best part of nine months, the two series have parted company.

The scale of the discrepancy is similar to the experience in 1988, when CBI surveys turned out to be right. If that is the case, manufacturing output will eventually be revised up. The downward revision to the first estimate of GDP which appeared to vindicate the Chancellor's decision to leave interest rates on hold could be followed by an upward revision.

The CBI is talking to the CSO about the discrepancy, which may be explained by the adjustment official statisticians make for stock-building. Given the importance of the issue, these discussions should be brought to a speedy conclusion and made public as soon as possible. Otherwise the who is right on interest rates - Ken Clarke or Eddie George - is going to get out of hand.