US Dollar - Special offer - 2 for 1

[Darat]

I’ve been watching the rise of sterling (and the Euro) against the US dollar for the last few weeks and found the commentaries of the financial pundits fascinating.

I can remember when sterling dropped below 2 dollars for the first time and as far as I can recollect the pundits were up in arms about this saying it was terrible, nothing worse could happen for the UK economy.

Now I'm seeing pundits bemoaning that the strength of sterling against the dollar is a terrible thing and nothing could be worse for the UK economy.

What is the big deal? Is it a problem or does it just mean cheap holidays to the USA for UK citizens?

[Jaggy Bunnet]

Originally posted by Darat
I’ve been watching the rise of sterling (and the Euro) against the US dollar for the last few weeks and found the commentaries of the financial pundits fascinating.

I can remember when sterling dropped below 2 dollars for the first time and as far as I can recollect the pundits were up in arms about this saying it was terrible, nothing worse could happen for the UK economy.

Now I'm seeing pundits bemoaning that the strength of sterling against the dollar is a terrible thing and nothing could be worse for the UK economy.

What is the big deal? Is it a problem or does it just mean cheap holidays to the USA for UK citizens?

Its a big deal if you are trying to export to the US. Lets say it costs you £100 in wages and other costs to manufacture your widget and your competitor made the same widget in the US and his costs were $100.

When the exchange rate was 1:1, both of you could sell in the US for $150 and make a nice healthy profit.

Now the exchange rate is 2:1, if you sell it at the same price, you are making a loss. If you try and raise your price you will not be competitive against the local producer as his costs are in dollars.

Of course if you are importing, then the situation is reversed and the goods you buy are relatively cheaper. You would lose out when the dollar was strong and the pound weak.

Unsurprisingly it is whoever is losing out who makes the most noise, exporters when sterling is strong and importers when sterling is weak. When the exchange rate is favourable both sit back and count the profit, which is why, whatever the exchange rate is, there is always somebody complaining that it is damaging their business.

[Matabiri]

Originally posted by Darat
I can remember when sterling dropped below 2 dollars for the first time and as far as I can recollect the pundits were up in arms about this saying it was terrible, nothing worse could happen for the UK economy.

Wasn't that when Britain was locked into the exchange rate mechanism, though, and all the pundits could see happening what did happen - i.e. dumping of sterling onto the market, the government having to buy it to maintain its value, and eventually running out of money and having the whole thing crash?

Whereas this time, although our economy is strongly influenced by the US economy, we don't have that tie which brought us down last time.

[Giz]

Originally posted by Darat

What is the big deal? Is it a problem or does it just mean cheap holidays to the USA for UK citizens?

As an individual, it just means cheap holidays in the USA.

On a larger scale it implies that financial analysts think that the US economy is weakening* vis a vis UK/Europe. The problem here is that it's not the UK/Eurozone doing really well (which would be fine) it's that the USA (at least in potential) isn't. Given the US tends to be the motor of the world economy this isn't good news for anyone**.




* Perhaps due to scary levels of personal borrowing limiting future consumption.

** Except bailiffs.

[Nikk]

Originally posted by Giz
As an individual, it just means cheap holidays in the USA.

On a larger scale it implies that financial analysts think that the US economy is weakening* vis a vis UK/Europe. The problem here is that it's not the UK/Eurozone doing really well (which would be fine) it's that the USA (at least in potential) isn't. Given the US tends to be the motor of the world economy this isn't good news for anyone**.




* Perhaps due to scary levels of personal borrowing limiting future consumption.

** Except bailiffs.



Actually it is good news for european companies who can buy good quality US assets cheaply.

It also assists us in making the Euro a major reserve currency which has huge potential economic benefits at the expense of the US.

As long as oil is routinely priced in $ a weak dollar makes oil cheaper in euro terms although a weak volatile dollar makes it more likely that sellers will choose to price oil in euros in the long term.

[Jocko]

Originally posted by Giz
As an individual, it just means cheap holidays in the USA.

On a larger scale it implies that financial analysts think that the US economy is weakening* vis a vis UK/Europe. The problem here is that it's not the UK/Eurozone doing really well (which would be fine) it's that the USA (at least in potential) isn't. Given the US tends to be the motor of the world economy this isn't good news for anyone**.



Actually, it has many benefits (here in the US, that is). It devalues the national debt and helps reduce our staggering trade deficits. Don't worry, we'll be pricing ourselves out of the market again before you know it.

[Lothian]

Originally posted by Nikk
Actually it is good news for european companies who can buy good quality US assets cheaply.
. but not so good for the european companies whose good quality products are now more expensive than their american equivalents.

It is swings and roundabouts but most people generally prefer their currency to rise in value than fall.

[Darat]

Originally posted by Lothian
…snip…

It is swings and roundabouts but most people generally prefer their currency to rise in value than fall.

Is that not just a bit of jingoistic pride as in my wotsit is bigger then yours?

Since I made my OP I’ve been trying to find out how an “expert� comes to the conclusion if a currency rise is good or bad for a country. Even in countries that have suffered from massive fluctuations (such as Brazil a couple of years ago) and which I’d expected to find a polarised expert views I can find experts who say it’s bad and experts who say it’s good.

It seems many of these “economic experts� are really just putting forward their opinions rather then a sound evidence based conclusions?

[Matabiri]

Originally posted by Darat
It seems many of these “economic experts� are really just putting forward their opinions rather then a sound evidence based conclusions?

Yet don't economists regard economics as "the queen of the social sciences", because they think they have testable theories...?

I'd guess one of the problems is that they get paid for opinions, and the more contentious the opinion, the more it's repeated (and its value rises, fnar).

See also: assessments of house price movements in the UK.

[Jaggy Bunnet]

Originally posted by Darat
Is that not just a bit of jingoistic pride as in my wotsit is bigger then yours?

Since I made my OP I’ve been trying to find out how an “expert� comes to the conclusion if a currency rise is good or bad for a country. Even in countries that have suffered from massive fluctuations (such as Brazil a couple of years ago) and which I’d expected to find a polarised expert views I can find experts who say it’s bad and experts who say it’s good.

It seems many of these “economic experts� are really just putting forward their opinions rather then a sound evidence based conclusions?

Expert paid by exporters says a strong local currency is bad, as he is asked to look at impact on export sales.

Expert paid by importers says a strong local currency is good, as he is asked to comment on impact on price of goods being purchased.

However, I suspect that both experts would agree that high volatility is bad, as it makes forecasting and planning difficult.

I don't think it is quite fair to say people wanting a high wotsit are necessarily being jingoistic. Many people will consume services priced in overseas currencies (i.e. holidays) but far fewer will be directly involved in selling to overseas. Therefore they tend to fall into the "importer" camp and want to see a strong wotsit as that best suits there personal circumstances. It may be a short term view (as the company they work for might decide to move production abroad to pay wages in a cheaper currency) but it is more than mere jingoism.

[Darat]

You're right -jingoism was too strong a word, but speaking to people I know they do have a certain amount of "pride" that sterling is "worth" so much more then the dollar.

[shanek]

Originally posted by Darat
I’ve been watching the rise of sterling (and the Euro) against the US dollar for the last few weeks and found the commentaries of the financial pundits fascinating.

I can remember when sterling dropped below 2 dollars for the first time and as far as I can recollect the pundits were up in arms about this saying it was terrible, nothing worse could happen for the UK economy.

Now I'm seeing pundits bemoaning that the strength of sterling against the dollar is a terrible thing and nothing could be worse for the UK economy.

What is the big deal? Is it a problem or does it just mean cheap holidays to the USA for UK citizens?

The dangers of monetary devaluation that come along with fiat currencies are very real indeed. We've just lucked out in that most industrialized countries use a fiat currency and so are all going down the crapper together, and relatively speaking it works out.

[TragicMonkey]

Economics is a mystery wrapped in an enigma that is boiled in perplexity in a pot of riddles, served on a bed of steaming hot confusion by a waiter who's just guessing at random, confident in the knowledge that it's all so complicated you'll never catch him at it.

It's only the "queen of the social sciences" because economists get paid a lot more than sociologists.

[Lothian]

Originally posted by Jaggy Bunnet
Expert paid by exporters says a strong local currency is bad, as he is asked to look at impact on export sales.

Expert paid by importers says a strong local currency is good, as he is asked to comment on impact on price of goods being purchased.
As far as a country is concerned I expect that whether a rise in the value of the currency is a good thing is by reference to the trade deficit or surplus with the affected country.

We tend to import more than we export so if that holds for trade with the states then it is (i presume) better for us if the pound rises.

[Jaggy Bunnet]

Originally posted by Lothian
As far as a country is concerned I expect that whether a rise in the value of the currency is a good thing is by reference to the trade deficit or surplus with the affected country.

We tend to import more than we export so if that holds for trade with the states then it is (i presume) better for us if the pound rises.

Except that you have to generate wealth to pay for the imports. How do you do that if your exports are too expensive to compete?

[Lothian]

Originally posted by Jaggy Bunnet
Except that you have to generate wealth to pay for the imports. How do you do that if your exports are too expensive to compete? That's easy. You sell ID cards at £70 a go ;)

[Matabiri]

Originally posted by Jaggy Bunnet
Except that you have to generate wealth to pay for the imports. How do you do that if your exports are too expensive to compete?

Convince people to invest in the currency/country - one of the reasons the dollar is very low is because interest rates are very low, so no-one's interested in buying dollars for investment.

[Giz]

Originally posted by Jocko
Actually, it has many benefits (here in the US, that is). It devalues the national debt and helps reduce our staggering trade deficits. Don't worry, we'll be pricing ourselves out of the market again before you know it.

Oh it certainly has it's good sides, personally I kindof like having a competatively cheap currency - until its vacation time!

It's just that the dollar's fall represents a weakness in a significant part of the global economy. Like I said, it's not like the Eurozone is surging ahead on it's merits, the Euro is rising based on it NOT being the dollar rather than the Euro being "good" per se.

People on my side of the pond saying it's a good thing are (IMHO) mistaking us doing well with one of our trading partners doing relatively badly. I also don't see how the temporary weakness of the dollar leading to the "rise of the Euro as a major reserve currency" is necessarily a good thing? Unless we define tying the world economy ever more tightly to the staggering, moribund heap that is the Eurozone as a "good thing"...

[Nikk]

Originally posted by Lothian
but not so good for the european companies whose good quality products are now more expensive than their american equivalents.

It is swings and roundabouts but most people generally prefer their currency to rise in value than fall.

Depends what US exports consist of, how price sensitive they are and what they are competing with. Commodities are highly sensitive to price but there are other factors to consider.

For example the US has a near monopoly in consumer computer software but the demand is not going to increase by 30% because of an equivalent drop in the value of the dollar. How many copies of windows does the average consumer buy? The same applies to "cultural" exports - a big earner but again demand probably depends on perceived quality rather than price. How much would you pay for a DVD of "The Passion of Christ" for example? How much of an incentive is 30% off nothing?:D

Alternatively take an area where the US has a positive but declining trade balance such as agricultural products. The US exports commodities like wheat and imports processed products like scotch whisky. If US wheat becomes cheaper in Scotland will US citizens drink less whisky? Fat chance!

Presumably the drop in value of the $ will benefit the US trade balance to the detriment of the EU to some extent but I doubt if it will be anything like pro rata. I can't forget that the £ was under pressure from the mid sixties to the early nineties but it did not lead to the UK becoming an export led powerhouse like Germany whose currency remained strong for almost the entire period.

[Luke T.]

They (Vast Right Wing Conspiracy) were just saying on NPR this morning that the weak American dollar was resulting in Europeans investing in the U.S. big time.

[Nikk]

Originally posted by Giz




I also don't see how the temporary weakness of the dollar leading to the "rise of the Euro as a major reserve currency" is necessarily a good thing? Unless we define tying the world economy ever more tightly to the staggering, moribund heap that is the Eurozone as a "good thing"...




Well economists seem to think so. For convenience here's an extract from a wikipedia article which seems to represent the consensus view - but who knows, it could all be a load of monkey poo.....

............"Negative balances are not necessarily terrible news, either. In particular, an effect known as reserve currency status makes it possible for dominant currencies to run significant trade deficits with limited economic impact. Because the United States dollar is generally regarded to be extremely stable, dollars which are exported are held by persons overseas and there is no pressure to return them to the United States. Furthermore, countries running large trade surpluses (e.g. China and Japan) use these funds to purchase US Treasury Notes, essentially allowing the United States to export monetary paper and get real goods and services in return. The pricing of oil in US dollars also forces nations and institutions to hold some of their reserves in US dollars in order to hedge against the rapid rises and falls in prices of this all-essential energy source.

Reserve currency status, however, is not without its risks. While the United Kingdom enjoyed economic benefits through the 19th Century up until 1914 from the strength of the British Pound and its reserve currency status, the relative weakening of the UK and strengthening of the US economies in the inter-war and post-war periods caused the shift in currency reserves, culminating in a 30% devaluation of the British Pound in 1949 which ended the dominance of the British Pound as a world currency. Weighed down by the debts of fighting World War II, and without the benefits of reserve currency status, the United Kingdom struggled to rebuild its economy, entering a period of economic slow down and decline that would last over three decades.

If, as some economists are speculating, current weakness in the dollar were to cause the shift of foreign exchange reserves or oil pricing into another currency such as the Euro, then the reserve currency advantage would also switch to the European Union..........."

Effectively reserve currency status gives you something - goods and services, for nothing - bits of paper, or even an electronic signal which merely represents bits of paper. If the US wants to give away such a "good" it would be churlish to refuse:D .

[shanek]

Originally posted by Luke T.
They (Vast Right Wing Conspiracy) were just saying on NPR this morning that the weak American dollar was resulting in Europeans investing in the U.S. big time.

Of course, the more foreign investment you have, the greater the trade deficit; both of these are just things people can use to make it look good or bad, however they want. They just point out one and ignore the other.