Letter: Introducing sense into the currency markets

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The Independent Online
Sir: European finance ministers and their central banks are fighting the wrong battle with the wrong weapons. When cheap forward cover is available to anyone exposed to currency fluctuation, it is ridiculous to set economic policy on the basis of turmoil in short-term currency markets,

Instead of squandering taxpayers' money to provide exchange speculators with a one-way bet on devaluation, the only sensible commitment should be to the average medium- term rate - the only one that matters for the important decisions on investment, pricing and capital issues.

Had ERM parities reflected medium-term average targets, rather than mandatory requirements, the UK would still have been in the ERM and would have been several billion pounds - and probably several hundred thousand jobs - better off. There would have been no temptation to use high interest rates to enter the ERM at a parity that was never credible to the long-term market, and there would have been no requirement to buy billions of forex at a loss.

With sterling, under its own volition, creeping back up to a level that would have looked sensible had we adopted it in the first place, the complete irrelevance of spot currency markers to anything that matters should be apparent.

A regime of medium-term exchange targets with no fixed floor would have the attraction that the profit-and-loss account of a Central Bank would provide a direct indicator of the quality of economic management.

If targets were realistic and credible in long-term markets then the Central Bank, as an insider trader, would make handsome profits from hysteria in the currency markets. Poor judgement, though, would be reflected in losses which could no longer be excused by reference to fault lines or speculative conspiracies.

It would be reassuring to know that next time an 'official' recession was being considered there was a sporting chance that the Governor of the Bank of England would be appearing in the insolvency courts alongside its future victims.

Yours sincerely,


Director, Manchester Business School, University of Manchester