The pound is taking a tumble thanks to Johnson’s failures
The Swiss franc hit parity with the dollar this week. A weakening euro is probably only days away from a one-to-one exchange rate. And the pound? In reality it has been sinking like a stone against the American currency since the start of the year, making imports more expensive, undermining confidence in the British economy, and adding to an already worrying cost-of-living crisis.
True, there are plenty of global factors to explain that. From rising interest rates in the US, to energy security, to the inevitable rush to the ultimate safe haven as the war in Ukraine unfolded. But we should also be clear on one point. The collapse in the value of the pound is also a damning verdict on Boris Johnson, the Prime Minister, and his increasingly hapless Chancellor, Rishi Sunak.
A series of catastrophic policy mistakes mean the British economy is heading into the worst crisis it has faced in a long time – and we can no longer rule out that sterling will fall all the way to parity with the dollar for the first time in its history. Amid the soaring price of oil, the crash of the once high-flying tech stocks, and return of rampant inflation, it would have been easy to miss the other big financial trend of the year so far: the strengthening of the dollar.
Even with a hopelessly weak president, and with prices rising as quickly as anywhere in the world, money has been flowing back into the American currency. It hit the symbolic rate of one to one with the Swiss franc on Thursday. From 1.22 against the euro a year ago, the dollar has climbed to 1.04, and in the currency markets the expectation is that parity will be reached some time this month.
The European currency has not been this weak since the winter of 2001 right after its launch when it dropped all the way down to 90 cents before steadily recovering.
If anyone was hoping that the pound would be exempt from that, they are deluding themselves. In the space of the last month sterling has dropped from $1.31 (£1.09) to $1.22, and over the last year from $1.41. And it is still getting steadily weaker with every week that passes.
Sure, there are plenty of explanations for why the dollar is so strong, and all of them make plenty of sense. First, the Federal Reserve started lifting interest rates from close to zero before any other major central bank, and winding up its programme of quantitative easing as well, and that helps the currency.
Next, it is self-sufficient in energy (wow, fracking works, who could have possibly guessed), which means the vast increases in the cost of oil and gas are not blowing out the trade deficit, or stoking inflation. And finally, in a moment of global turmoil it remains the ultimate safe haven, and as Russian tanks moved into Ukraine it was no surprise that assets around the world also moved into dollars. Any of those factors would have strengthened the dollar. Put them all together, and its rise was inevitable.
And yet, we all should not ignore one very simple fact. The UK has put itself in a uniquely vulnerable position, and it has done so through poor leadership, and a series of major policy blunders. Such as?
Our departure from the European Union has worsened the trade deficit at precisely the wrong moment. It hit £278bn in the first quarter of the year, the highest figure on record, and equivalent to 1.8pc of GDP.
“In our view, this is a big enough deficit to merit concern about the stability of sterling,” argued High Frequency Economics in a note this week. Unfortunately that is true. We could have mitigated the impact of Brexit with a number of radical policies to scrap tariffs, deregulate and cut taxes to dramatically improve our competitiveness.
Instead, we left everything as it was, and put up some trade barriers, so we can hardly be surprised if the trade balance has worsened.
Next, a senseless commitment to hitting “net zero” before any other major economy, and an addiction to climate virtue signalling, means we have run down North Sea oil and gas, and left huge shale oil reserves unexploited. The result? We have had to pay vastly more for imported energy when we could easily have been
‘We can no longer rule out sterling will fall all the way to parity with the dollar for the first time in its history’
self-sufficient. Finally, we have become addicted to state spending, and hooked on printed money. We have ramped up public spending to levels unprecedented in peace time, with taxes set to rise and rise to pay for it, making our economy less competitive than ever.
Even worse, as QE winds up, we will have to borrow money from abroad to pay for both the trade and public sector deficits, and the UK will have to be very cheap to persuade anyone to park their money in the currency. It is not a happy mix.
In reality, a series of self-inflicted mistakes have weakened the British economy. A weaker currency is going to increase the price of everything we import, making the cost-of-living crisis even worse than it otherwise would be. It is going to undermine the confidence of the global markets. And it will make British industry vulnerable to takeovers at a time when it should be strengthening its position in the world.
The lowest the pound has ever been since the currency was floated in the early 1970s was $1.08 (on Feb 25 1985, in case anyone’s memory doesn’t stretch back quite that far). It looks inevitable it will weaken still further over the summer.
It may survive without hitting parity, but it is definitely about to hit all-time lows. And if it does go to the humiliating level of one to one with the dollar, the lowest in its history, it will be a damning verdict on Johnson’s increasingly dismal premiership.