dollar in free-fall?

free4440273

the strength of the pound has been relentless today - new high of 2.0160. It seems as though the BofE will have no choice but to hike rates now, perhaps even by .50 per cent merely to 'support' the pound. if they do not raise, then surely the currency markets will turn their back on the pound? i think the last high reached this year was at 2.0132 - this surpasses that! at this rate you could (quite probably) purchase two houses in the USA and yet conversely only one house (if that) in the UK, at this currency level. worrying.

Dr_Doom_3

I would speculate that the reason the pound is gaining strength vs the dollar is the market expectation that rates will rise. So yes, if rates do not rise the pound will decline vs the dollar.

Short term forex exchange rates shouldn't enter into MPC decisions though, the decision is supposed to be based on official inflation targets, & statistics. Plus the combined genius of the MPC committee to anticipate inflation and control it with rates to maintain a stable economy.

lol

kingkano

you could probably buy 4 or 5 houses there for the price of 1 here, although commuting would be a b****. I doubt its likely to affect their decision.

epz_2

forgive my ignorance but i always thought exchange rates were an indication of relative interest rate variations amongst other things.

my understanding is interest rates are used to control consumer spending and inflation by making borrowing more expensive meaning people cant spend and companies need to sack people.

now a low interest rate gives lower yield on investment and our exchange rate drops, this makes outside products and services more expensive but means we are more competitve against other countries therefor higher employment and lower deficit, also costs less to pay off goverment borrowing.

as i see it there doesnt seem to much reason to want to have an expensive currency relative to another unless you are a net importer of their stuff and want to keep getting into more debt to them.

free4440273

...thanks for the explanation. anyway, it is almost certain that a rake hike is on the cards now. this means the pound could go through the roof (no pun intended).

iom_dave

I think the problem with a weak pound is that we are a net importer of stuff (not services) so if the pound weakens inflation goes up - like in the good old 70's.

A house price crash would be avoided if 70s style inflation took off and interest rates didnt match it

free4440273

yes, and conversely we will find it hard to export our goods - not great for manufacturing (what's left of it). perhaps this does make a rate rise inevitable - BofE avoids inflation this way, as you say.

real1314

erm, increasing the interest rate will make the pound stronger against the dollar, thus exacerbating the situation vis-a-vis the £/$ exchange rate. The pound would rise further and the dollar would fall further. Maybe $2.10 for a £1?

Thjis would make imports from the US cheaper, but make exports to the US dearer.

If you think the aim should be to reverse this effect, then stasis or even a cut in interest rates would be needed.

thelawnet

real1314 wrote: »

erm, increasing the interest rate will make the pound stronger against the dollar, thus exacerbating the situation vis-a-vis the £/$ exchange rate. The pound would rise further and the dollar would fall further. Maybe $2.10 for a £1?

Thjis would make imports from the US cheaper, but make exports to the US dearer.

If you think the aim should be to reverse this effect, then stasis or even a cut in interest rates would be needed.

er no, the reason the pound has risen is that the markets believe that the Bank has no choice but to increase rates. It would be silly if you are 90% sure that yield will increase in a few days time to sell pounds cheap before that date, and then increase the price as if it was somehow a surprise.

Generali

iom_dave wrote: »

I think the problem with a weak pound is that we are a net importer of stuff (not services) so if the pound weakens inflation goes up - like in the good old 70's.

A house price crash would be avoided if 70s style inflation took off and interest rates didnt match it

This is exactly why the exchange rate has an impact on inflation and why the BoE will use interest rates to support the pound if necessary.

For example, if £1=$1.60 and a barrel of oil is priced at $80, that barrel of oil costs the British importer £50.

If the barrel of oil remains at $80 but the quid rises to £1=$2, the barrel of oil now costs our importer £40.

Higher £=cheaper imports. Conversely, our exports become more expensive to foreign buyers.

If the pound starts to fall quickly, the MPC will face the choice between rising inflation and putting up interest rates, regardless of economic conditions. If house prices start to fall and threaten to drag down the rest of the economy, this is going to be the choice facing the MPC IMHO.

globalds

thelawnet wrote: »

er no, the reason the pound has risen is that the markets believe that the Bank has no choice but to increase rates. It would be silly if you are 90% sure that yield will increase in a few days time to sell pounds cheap before that date, and then increase the price as if it was somehow a surprise.

It seems the pound has risen along with a tide of global currencies.
This is not so much a strenghthening of the pound ..more a weakness of the Dollar as the result of US economic policy.

It seems the most realistic location to look for an interest change would be the US and the direction ....Down.