April 18 2007 - The Short View By John Authers
The Short View By John Authers
Copyright The Financial Times Limited 2007
Published: April 18 2007 03:00 | Last updated: April 18 2007 03:00
£1 will now buy you more than $2. This is the first time that has been true since it closed above $2 for four days during its chaotic exit from the European exchange rate mechanism in September 1992. The landmark is of huge psychological importance in the UK. It makes less of a dent on the American psyche, but it has implications for the US.
The critical moment came with the publication of UK consumer price inflation data. At 3.1 per cent, prices were rising at their fastest rate in the 10 years since the Bank of England was made independent. This was a real surprise and sharply increased the likelihood of further rises in the bank base rate from its present 5.25 per cent - enough to push the pound past the landmark. Then came inflation numbers for the US, which showed core inflation actually decreasing last month. Predictions of a benign Federal Reserve, keeping rates on hold for many more months, looked all the safer. That held sterling above $2. So yesterday's rise in sterling was, in itself, wholly justified by the new data.
Health warnings are needed. Inflation data on both sides of the Atlantic are prone to noise. Mansoor Mohi-uddin, currency strategist at UBS, cautions that this year's momentum that has strengthened the pound and weakened the dollar has come from diversification by central banks, which are reducing their reliance on the US currency. That will soon run its course.
In the long run, currencies converge towards purchasing power parity - so £1 in the UK should buy you exactly as much as $2 in the US. Anyone who has travelled between the two countries recently can testify that this is far from the case. For the long term, sterling is overvalued. But it can stay above $2 for longer than it did in 1992 if the BoE fulfils the now universal expectation to raise rates at least once more. The minutes of the BoE Monetary Policy Committee's April meeting will reveal more about how hawkish the bank might be. All of this puts recent fears that the US economy will overheat into perspective.
The UK has double-digit house-price inflation, an overvalued currency and accelerating inflation. It is overheating, the US is not.
Copyright The Financial Times Limited 2007
Published: April 18 2007 03:00 | Last updated: April 18 2007 03:00
£1 will now buy you more than $2. This is the first time that has been true since it closed above $2 for four days during its chaotic exit from the European exchange rate mechanism in September 1992. The landmark is of huge psychological importance in the UK. It makes less of a dent on the American psyche, but it has implications for the US.
The critical moment came with the publication of UK consumer price inflation data. At 3.1 per cent, prices were rising at their fastest rate in the 10 years since the Bank of England was made independent. This was a real surprise and sharply increased the likelihood of further rises in the bank base rate from its present 5.25 per cent - enough to push the pound past the landmark. Then came inflation numbers for the US, which showed core inflation actually decreasing last month. Predictions of a benign Federal Reserve, keeping rates on hold for many more months, looked all the safer. That held sterling above $2. So yesterday's rise in sterling was, in itself, wholly justified by the new data.
Health warnings are needed. Inflation data on both sides of the Atlantic are prone to noise. Mansoor Mohi-uddin, currency strategist at UBS, cautions that this year's momentum that has strengthened the pound and weakened the dollar has come from diversification by central banks, which are reducing their reliance on the US currency. That will soon run its course.
In the long run, currencies converge towards purchasing power parity - so £1 in the UK should buy you exactly as much as $2 in the US. Anyone who has travelled between the two countries recently can testify that this is far from the case. For the long term, sterling is overvalued. But it can stay above $2 for longer than it did in 1992 if the BoE fulfils the now universal expectation to raise rates at least once more. The minutes of the BoE Monetary Policy Committee's April meeting will reveal more about how hawkish the bank might be. All of this puts recent fears that the US economy will overheat into perspective.
The UK has double-digit house-price inflation, an overvalued currency and accelerating inflation. It is overheating, the US is not.
posted by Carlos T Mock at 8:39 AM
0 Comments:
Post a Comment
<< Home