So the world re-aligns. The US and UK see the consequences of all those years of borrowing. And the rest of the world look on, and thank their lucky stars their own economies were based on producing things. But all of a sudden, it looks different. France joins Germany, Italy and Spain in the recession-fears club; Japan stutters; China changes; and we wait and see whether the recent trend seen of falling oil prices continues, and if it does continue, what this means for Russia.
And as all this happens, the dollar turns from being yesterday’s whipping boy, to the big buying opportunity.
The dollar is now at its highest price relative to the euro since February; relative to sterling it is at its highest price since November 2006. And the change really is like clockwork.
If you believe that the UK economy lags around 18 months behind the US, then the timing is about right – maybe a touch late, but the right ballpark.
In some ways the recent falls in the dollar against sterling seemed a touch odd. After all, the UK has suffered from similar problems to the US – massive current account deficit, over-indebted consumers. It is just that the US suffered first.
But what we are really seeing now, though, is something quite curious.
The dollar has fallen because the US economy needs to export its way out of trouble. This has gone into reverse, partially because the rest of the world can’t afford to let the US export its way out of trouble.
So, if the dollar continues to rise, US exports will fall, and the US economy will weaken again.
The world needs to see two things happen. It needs to see oil, food and other commodities fall in price – and it needs to see the Chinese consumer continue to spend more. If neither of these things happens, then it is difficult to see how the current economic crisis can improve any time soon.
Comments
Trackbacks