The good and bad of $1.70

Pounds and dollars

On Monday 20 October 2008, there was a fair old chance that the UK was bust.

The country's enormous banks were in deep deep trouble, and were in the process of being bailed out to the tune of around £1.3tn - not far off the value of UK GDP or national output - by the government.

Most of the rescue funds was in the form of loans and guarantees. But there was no certainty how much of that public money would eventually have to be written off - and whether the state could afford the eventual losses.

With banks too weak to lend, the economy was shrinking frighteningly fast. Which meant that tax revenues were plummeting, forcing the government to borrow unprecedented amounts, to keep the public sector running.

We were on the brink of catastrophe.

Unsurprisingly, sterling no longer seemed quite so attractive to the plutocrats who control the world's squillions. They dumped the pound.

On that day, the UK's currency fell through $1.70, and kept on falling - till it hit a low of $1.3668 on 23 January 2009.

All of which means there is quite powerful symbolic value in the pound's return today - Monday 16 June 2014 - to $1.70.

It shows - in case anyone still had a residual worry - that the UK isn't bust.

Indeed, if you rate the rating agencies (as it were), you would conclude that the reverse is true - since on Friday S&P removed the red flag over the UK's AAA or platinum-quality credit rating, and said it was now stable

More than that, $1.70 is a manifestation of the strength of the UK's recovery compared to what's going on in other developed economies.

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Those who run important UK trading businesses tell me they can cope with sterling where it is today - though they are a bit anxious about the direction of travel”

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It is the strength of the British recovery - and the risk that it will spark renewed inflation - that prompted the Governor of the Bank of England to signal last week that it will be the first of the major central banks to lift its bank rate or "policy" interest rate above near zero - where it has been since March 5 2009.

If you are an investor therefore you conclude that you will get a marginally improved rate of return by investing in the UK.

By contrast in the eurozone the European Central Bank is still trying to cut the cost of money, to less than zero (the measure of just how mullered that region is).

And in the US, extreme low interest rates are likely to persist a bit longer than in the UK, partly because there has recently been a hiatus in its economic revival.

So sterling looks attractive compared with dollars and euros.

That said, not everyone loves a strong pound. Exporters have to improve the quality of their goods and services, or cut prices and squeeze their profits, to remain competitive when the currency is strong.

If the surge in sterling were not to abate, there would come a moment when exporters would start to howl and complain that they were being priced out of important overseas markets - and that would be very bad news for our economic prospects.

Fortunately, those who run important UK trading businesses tell me they can cope with sterling where it is today - though they are a bit anxious about the direction of travel.

On the other hand, the rise should temper the cost-of-living squeeze that would result from the current surge in the dollar price of oil - caused by the mess in Iraq.

To put it another way, although the rise of sterling has a mixed impact on our lives and livelihoods, it says broadly positive things about the health of the British economy.

Unlike what happened to the England football team on Saturday night, it shows we are winning again.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 19.

    Peston’s obligatory “it’s all alright” article.

    Meanwhile in the real world, those using foodbanks top 900,000; a 163% increase.

    Robert?... Robert?... Hello?... Robert?

  • rate this

    Comment number 18.

    It says the rest of the World has printed more and expects UK rate rise.
    Not too sure of that as imports will rise and REAL job growth slows.

    The massive DEBT overhang will catch us in the end - US/EU/UK/RoW.

    I saw first hand 2007/8. We are on that exact precipice again.

    Smoke and mirrors only gets so far before reality steps in.

    Only question is timing - before the election or after?

  • rate this

    Comment number 17.

    It does show the pain of austerity is working and that confidence is returning to the UK. Osbourne's policies have clearly been credible, much more than Ball's would ever have been.

    That said, a strong pound won't help exporters and keeping exports expanding is a key piece still missing in rebalancing the economy.

  • rate this

    Comment number 16.

    "It shows the Tories have turned things around. No one will give them credit for it though."

    I'll agree when the passport office is employing enough staff to deal with applications promptly, our armed forces, police and immigration services are properly staffed and equipped, jails are not bursting at the seams and the Tories have paid off the large amount of money they have borrowed since 2010.

  • rate this

    Comment number 15.

    The rating agencies. You mean those companies who are paid by the organisations they report on, and therefore had a key part in not warning anyone about the financial crisis?

  • rate this

    Comment number 14.

    9. What makes you think we are interested in your personal circumstances?

  • rate this

    Comment number 13.

    I don't know what it means. So much of our GDP is generated by London-based invisibles that it is difficult to judge whether a reviving economy is the reason. A better indicator would be the return of manufacturing jobs from China.

  • rate this

    Comment number 12.

    It means someone in a financial institution somewhere is making money.

  • rate this

    Comment number 11.

    What it shows is that painful medicine can indeed get the UK economy moving back to health. Whereas, European fudge and procrastination fails miserably.

  • rate this

    Comment number 10.

    Another point on Sterling is that we import a lot of raw materials and components from abroad to make finished products. This is why the producer price index has plumeted as import costs have fallen.

    A smart manufacturer should be able to make money regardless of Sterling's level, as long as they are not a primary producer.

  • rate this

    Comment number 9.

    I think it is more important to look at what it doesn't mean.

    From a purely personal point of view, it doesn't mean I am not going to get kicked out of my house sometime in October because my employer went bust last year and I have been unable to find another job.

  • rate this

    Comment number 8.

    The Economic data would have improved what ever the government did regardless of party), as long as the Markets believed that they were going to stick wit whatever they said the would do.

    Less austerity under Labour would have worked just as well.

    After all it was Brown and Darling who prevented n Argentine-style run on the banks.

    Who of u would have liked that?

  • rate this

    Comment number 7.

    It shows the Tories have turned things around. No one will give them credit for it though.

  • rate this

    Comment number 6.

    Remember Ms Merkel. Slowly slowly...

  • rate this

    Comment number 5.

    If you are a US company holding lots of Stirling, a strong pound when converted back into USD for the purposes of defining profit, is going to make your company look very profitable indeed. So the strong GDP is more a reflection on Fed QE than it is to do with how well or otherwise the British economy is doing.

  • rate this

    Comment number 4.

    Excellent academic economic review but doesn't feel like we are winning from my perspective. I still feel as if I'm considerably worse off than I was 6 years ago, housing is now unaffordable and wealth continues to shift to the richest. Absolutely no change in the banking systems - only a matter of time before we go through the same pain.

  • rate this

    Comment number 3.

    it says someone is investing heavily to make even more profit.

  • rate this

    Comment number 2.

    I think it's now certainly true the the economy is getting much better - but you have to wonder what would have happened if the Government had instead Labour's policy of continued spending as if there were no tomorrow ?

  • rate this

    Comment number 1.

    It says that the markets think that there will be an interest rate rise in the UK very soon, and if there isn't the exchange rate will fall back again.

    Nothing new here.


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