The dollar looks fragile - but sterling's far worse

published 21 January 2008

The old investment adage - never bet against the US consumer is starting to look like it will finally be proved wrong this year. Retail giant Sears has warned that its fourth quarter earnings may fall by as much as 51% on last year, while credit card provider Capital One warned last week that its full-year results wouldn't meet expectations.

And it's not just the less well-off who are suffering. American Express had to write off around $440m last quarter due to rising bad debt provisions, and now expects to miss Wall Street forecasts for 2008. And that's depsite the 2007 claims from its chief executive Daniel Henry that it would be protected because of its "affluent and high-spending" clientele.

Then there is Tiffany. The silver tat seller saw like-for-like sales in the US fall by 2% in the final two months of the year: it seems people are more concerned about hanging on to their houses than buying overpriced keyrings at the moment. These are the kind of numbers that convert bulls into bears: they leave little doubt that the US is in or near recession and that betting against the US economy in 2008 makes sense.

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But does it still make sense to bet against the US dollar? I'm not so sure about that. It has fallen by about 11% on a trade weighted basis over the last year and there is now so much negativity surrounding it that it really wouldn't take much good news to see it go higher. Anything remotely upbeat, from a cheerier outlook on Iraq, to US investment banks writing off less debt than expected, to just the high spirits that tend to come with election years could send it higher in the short term.

More important for sterling investors is the fact that if any currency looks more fragile than the dollar, it's the pound. While the US is already well into a housing downturn and is now increasingly coming to terms with the threat of a recession, the UK has yet to reach this level of pessimism in other words, there's not yet enough bad news priced into sterling. The pound has already fallen sharply from more than $2.10 less than three months ago, to around $1.95 now. But you only have to go back as far as March 2006, to find it at $1.75.

With our own housing market weakening rapidly, and our government massively overdrawn, the Bank of England will keep coming under pressure to cut interest rates further. It may not be long before we're fretting about the single euro pound, rather than bragging about the two-dollar one.

First published in The Evening Standard 15/1/08

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.