HAMISH MCRAE: Get ready for a weaker dollar

Daily Mail​

21 hours ago

The dollar is getting weaker – and it's going to get weaker still. By Friday, the pound was up around $1.37, close to its highest for four years, and I expect it will climb above $1.50.
That's still a long way from the heady days before the banking crash in 2007 when it was last above $2, but a lot more respectable than the sub-$1.20 level during the awful autumn of 2022.
But before you think this is some sort of endorsement of the policies of our present Government, this isn't much to do with the pound. It's a story about America, not about the UK.
Talk to people here in the US and, depending on their politics, you hear a mixture of triumphalism and grudging respect for what has happened in the past few days. No surprises there.
Share prices are back to their all-time highs. But, for anyone following economic policy, there was a disturbing development: Donald Trump has stepped up his drive to undermine Jerome Powell, chair of the Federal Reserve.
The President has been characteristically offensive about the head of the US central banking system for some time, calling him 'a very stupid person', 'terrible', 'numbskull', 'having a low IQ for what he does' and so on.
But the markets are so accustomed to these insults they brush them off. Powell is in post until spring next year and they will decide then whether the change of the Fed chair will shift policy.
They know Trump wants cheaper money – he's a property developer after all – but the Fed is independent, and they will wait until they know who the new chair will be before making any projections about interest rates.
But now Trump has ramped up the volume. Instead of waiting until next year, he mooted the idea of announcing Powell's successor this autumn, thereby creating a shadow chair whose presence would undermine his authority in his final months. Names in the frame include Scott Bessent, the Treasury Secretary.
Inevitably a shadow chair would increase the pressure on Powell and the rest of the board through the autumn as market expectations of looser policy to come would be hard to resist.
So the US seems likely to get lower interest rates sooner than was expected. And lower interest rates mean a weaker dollar.
There are other forces at work. International investors are wondering whether it's such a great idea to hold so much of their wealth in America.
Aside from the Powell spat, the administration does not want a strong dollar, because a cheaper currency helps boost exports and trim imports. And if you take a longer-term view, the dollar still looks high. Put all this together and you could conclude that the dollar is set to fall further, maybe a lot further.
What does this mean for us in the UK? There are obvious benefits, including cutting the cost of importing dollar-denominated commodities, notably oil.
That should come through fairly swiftly to the pumps, though it won't help much to cut electricity prices, as we closed our last oil-fired power station ten years ago.
But quite a lot of other goods, including some foods, are priced in dollars, so a cheaper dollar could indeed help with inflation, so thanks for that.
But it won't help UK exporters to the US, and remember that America is our biggest single overseas market. Nor will it help most of the big British companies that dominate the FTSE 100 index, as much of their global revenues are in dollars.
It will also push down the sterling value of the portfolios of UK investors who have done well out of the US share price boom.
Looking further ahead, the great question is whether this is simply a sensible course correction, or something bigger and potentially more disruptive.
Further devaluation of the dollar is no bad thing. In sterling terms, $1.50 feels fine and there could be an overshoot to $1.60.
But no one should wish for a dollar collapse. That would hugely disrupt global trade, investment, everything. You could say the world needs a solid dollar, but not an almighty one.
The world needs a solid greenback, not an almighty one.