Leading article: Bargain-hunters may be happy, but a strong pound has its downsides


The pound this week reached its highest rate against the US dollar since 1980; that is, more than a quarter of a century ago. It has now been above $2, and rising, for the best part of six months. The trend, which also sees the euro hitting record levels against the US dollar, is expected to continue, probably until next year's US presidential election at least.

The weak dollar is excellent news for visitors to the United States, and will naturally encourage Christmas shoppers to cross the ocean. Clothes and electronic goods, generally cheaper in the US anyway, will seem even greater bargains for us Europeans. The sky-high rates at Manhattan hotels will seem that bit more affordable. We may be tempted to stay a little longer, travel a little further, and buy a little more – helping the US economy, if only at the margin, as we do.

Nor is there any great downside to the weak dollar for Americans, unless they work or travel in Europe. The world oil price is set in US dollars, so while prices have risen in response to current tensions in the Middle East, a disadvantageous exchange rate is not an issue. For the administration, the weak dollar is an unalloyed boon. While successive presidents and chairmen of the Federal Reserve have insisted, as a matter of national pride, that they favour a "strong dollar" policy, they have shown little compunction about presiding over an effective devaluation.

George Bush is no exception. Watching the ballooning trade deficit with China, the US tried to persuade the Chinese to revalue their currency. Their efforts came to nothing, but allowing the dollar to fall goes some way to achieving the same objective. As the dollar falls, so the US external debt shrinks in real terms. There is little here for Mr Bush, and the Republicans in the run-up to next year's election, not to like.

The weak dollar, of course, results to a large extent from the sub-prime mortgage crisis in the US. With the precise extent of individual banks' and finance houses' exposure still not known, considerable worries remain. The 0.25 point reduction in interest rates announced this week by the Fed, the second reduction in as many months, was designed to fend off a serious slowdown. Better than expected US employment figures announced yesterday suggest that the lower interest rates are having the desired effect.

In Europe the picture looks rather more mixed. On the one hand, the strong euro constitutes an impressive international vote of confidence in the EU and its currency – which is, after all, less than 10 years old. The eurozone, which often seems so lacking in confidence internally, has rapidly become a phenomenal success. The strong euro also makes imports, including oil, cheaper than they would otherwise be. At the same time, however, it makes exports more expensive for the US and countries whose currency is pegged to the dollar. While eurozone exports have so far been relatively unaffected – and there are reasons why they could remain so – that resilience may not last for ever.

The question is where the pound fits in. On the downside, the weak dollar has led to a significant fall in the number of US visitors to Britain. The degree to which our economic growth is fuelled by credit and dependent on rising house prices also sets the UK apart from much of Continental Europe. And while the widely forecast slump in house prices has not – yet – come to pass, the small print of the Chancellor's pre-Budget report last month anticipated leaner years ahead. We had better make the most of the benefits from the strong pound while they last.

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