ALEX BRUMMER: Dollar showing its mettle, but pound cannot compete

One of the greatest changes of Queen Elizabeth II’s reign is the speed of communications. 

In global finance, as the writer Michael Lewis has chronicled in his book Flash Boys: A Wall Street Revolt, traders now think in milliseconds. 

Analysts and economic thinkers have more time, but there is still a tendency to hit the send button on Twitter without proper context. So it has been for sterling in recent weeks as the country has gone through a period of intense political uncertainty during which the pound’s vulnerability has been interpreted as evidence of grave crisis. 

Liz Truss’s reshaped Tory government acted quickly to staunch the wound. It opted for growth over fiscal orthodoxy, sacrificing the Treasury’s top mandarin Tom Scholar in the process. It has targeted money at the problem of energy prices, with a £100billion or more safety net for household incomes. 

That in itself takes a scythe to headline inflation, of potentially 4 per cent to 5 per cent, and will ease the squeeze on real incomes and the depth of the potential recession. The pound has bounced to $1.16 against the dollar – averting its 1985 low point – in spite of the Bank putting off its interest rate decision until September 22 in line with national mourning. 

As a freely floating currency, with no anchor to other trading blocs, the pound (which will soon have the new face of King Charles III on the notes), offers easy prey to speculators. Former Bank of England governor Mark Carney’s observation that the pound’s exchange rate is dependent on the ‘kindness of strangers’ had a nice ring. It is not as simple as that as sterling is anchored by the fact that, for all its faults, the UK is still much beloved by Middle-Eastern oil potentates and Hong Kong and Singaporean investors. 

All those visits the King made to the Middle-East have not been without reward. A ride down the race course at Royal Ascot with the monarch is still much valued by Dubai.

What the currency markets are going through at present is not a sterling crisis, as in 1976, but one of those moments when everyone loves the dollar. The parallel is with 1985 when the G5 (later to become the G7 with the addition of Canada and Italy) met at the Plaza in New York in a concerted effort to knock the value of the dollar down. 

The weakness of sterling, and other major traded currencies, was simply a corollary of the greenback’s strength. The current dollar renaissance, which has seen it climb by 20 per cent against a basket of global currencies in the past year, is not hard to explain. The Federal Reserve has hit the interest rate tool harder and faster than the European Central Bank, the Bank of Japan and the Old Lady of Threadneedle Street. 

As importantly, while much of the world is struggling with climate change transition and the impact of the Ukraine war, the US sits on a continent of fossil fuels. Since 2019 it has been net fuel exporter for the first time since 1952 – coincidentally the year of Elizabeth II’s accession to the throne. 

The US government has a key advantage. The dollar remains the world’s unchallenged reserve currency. Efforts by governments to diversify reserves by holding yen, euros or China’s renmimbi largely have failed. 

America has the extreme privilege of being able to issue dollar debt without fear of a shortage of customers. As technology moves on, a trusted, digitally created global stable coin might dislodge dollar supremacy. 

The pound cannot compete. But it is possible that if the UK could rediscover energy independence – a goal of the Prime Minister – it could become a petro-renewables currency to be trusted again.