Dollar turn is good for us all, says HAMISH MCRAE

The dollar has turned. You can see that in the sterling rate, with the pound now trading over $1.20 again. Gone is all that talk of the pound reaching parity, though there was a lot of that when it dipped to $1.07 in late September. 

Gone too is the plunge of the euro below parity. It was trading at $0.97 at the beginning of this month and is now up to $1.04. 

Markets never move in straight lines but – sticking my neck out – I don’t think we will see the pound down to $1.07 again for a generation. After all, the last time it was below $1.10 was in March 1985. That is a while ago. 

This is important in two ways. First, there is the immediate practical impact, in that dollar-denominated commodities, notably oil, become cheaper in national currency terms. It takes a bit of the pressure off inflation, and hence living standards. 

Petroleum products, that’s diesel, petrol, fuel oil and so on, have been the largest single contributor to producer price inflation since the start of this year. So, aside from the hit we have taken filling up our cars, it has dealt a massive blow to businesses large and small. 

Well, now the oil price is below its pre-invasion level in dollar terms. The Brent Crude benchmark is $85 a barrel, whereas on February 23, the day before Putin invaded Ukraine, it was $97 a barrel. But sterling then was worth $1.35, so thanks to the fall in the pound we are still paying more for our oil than we were then. 

Of course, the same applies to the cost of all imports. Food costs have been the second largest contributor to inflation this year. 

While no one can predict when the pound might climb back up to the level it was at the start of the year, the broad point stands that every cent it rises takes pressure off inflation, and every cent the euro rises against the dollar takes pressure off inflation in Europe. 

The second way in which the decline of the dollar is significant is in its symbolic importance as a measure of the mood of global markets. It is the great safe haven in troubled times. 

Where else do you go when you are really worried? Gold? Yes, but that is too small a market. Cryptocurrencies? Er, no. Other currencies? The euro was depressed because of obvious fears about the Continent’s supplies of energy, while the pound was ground down for reasons we all are rather too aware of. So it was the dollar. 

It will still be the dollar as the safe haven, and if the skies darken again expect it to nudge up a bit. But the fact that it seems to have topped out suggests that the world does not need the safe haven quite so much as it did in the summer. 

Or at least that is what the investment community seems to think. So what should we look for next? 

This gradual return to normality will be bumpy, and I am concerned that the downturn next year is not yet fully priced into equities. We don’t know how fast inflation will come down towards the 2 per cent target here, in the US, or in Europe. Long-term Government bond yields have fallen quite sharply, with that on ten-year gilts below 3 per cent for a while on Thursday. 

That is welcome for UK taxpayers, for money not spent on servicing the National Debt is money available for something else. But it would be unrealistic to expect yields to come down much further, and longer term they are more likely to head up. 

It would be unrealistic, too, to expect investing in the UK to come back into fashion any time soon. The flow of negative stories about the UK economy, some justified, some not, will continue for a while yet. Investors may bottom fish, picking up assets that are clearly undervalued, but do not expect a wall of money to flood across the exchanges. 

However, I do think the markets have passed the point of maximum fear (especially about the UK) and are starting to take a rational view of the shape of the global economy next year: a recession in most major economies but not a particularly serious or prolonged one. 

As far as the UK goes, the markets are more confident than economists, notably the OECD, which says we will have the worst performance of any G7 economy. 

The big question posed by the dollar’s downturn is whether this is just a change of mood, or a change of fundamentals, too. 

There can be no clear answer yet, but it is evident that the markets have, in their incoherent way, been at least as good predictors of what will happen in the world as economists. So the evidence that the former are less frightened than they were in the summer is a comfort for the rest of us.