Right now the exchange rate sits at 1/1.92. Looking back at even two months ago it was somewhere around 1/1.8 and looking back a few years it was around 1/1.6 or 1.7. a)What the hell happened? and b)When is it going to get better? (from the american perspective)

Cheers,
DFWLandingPath

It´s not the sterling £ that gone up it´s the opposite. Depends how patient the big US$ and US bond holders think, namely the Chinese and Japanese.

do you mean the euro?

xjr

XJRamper,

it's the dollar that went down and the euro and the pound which have stayed relatively constant.

It is very much down to Sterling..

The United Kingdom is going through some tremendous growth & prosperity at the moment and with the current economic crisis in other countries around the world this is helping Sterling to become stronger!

Regards,

Chris

When I visited the UK 2.5 yrs ago it was about 1/1.55. The Euro was just about 1/1. I'm having a heck of a time trying to get my trip plans for next month ready. Every time I do the conversion, it pisses me off. I bought a £44.98 U2 ticket, and it cost me $88.xx.  

Predicting and explaining currency movements is notoriously difficult partly because such movements are often irrational relative to economic fundamentals.Yet,the main reason for this particular movement is the US's 2 large,looming deficits:neither are sustainable.The fall in the dollar against the euro and pound will also be more exagerated than it would be without the Japanese and other Asian central banks intervening like mad to prevent their currencies depreciating.

Donder, that´s why clever people like Soros earns a lot of money....

It works both ways. A few years ago my parents went to the US and it was about $US1.1 to the £. They found things very expensive.

I'm wondering whether to buy a few $US and wait for the rate to drop back down again. Maybe a better investment than the 4% you get elsewhere.

The US is great - a first world country at third world prices!

Yes, the dollar is falling and yes, it will almost certainly fall more.
But, the drooping dollar is a good thing. And to moan about it is to
fail to understand the economics of foreign exchange. Moreover, the fall is being deliberately engineered by the US financial establishment (i.e., the Federal Reserve and the US Treasury), and it should continue for awhile to come. And that spells an opportunity for profits, although the ride down is
likely to be quite bumpy. A falling currency price is how markets bring trade and capital imbalances into equilibrium. The only alternative to letting the market decide the price of a currency is to install capital controls and trade
barriers, or to have the government intervene. All are acts of
desperation. Say what you will about the Bush administration, in the realm of
currencies it has adopted a free market approach. We may not like some
of the consequences of freely traded currencies, but at least the consequences of a free market policy are fairly predictable, unlike the unintended consequences of interfering. And indeed, the facts are all on the side of the dollar going down-a vast current account deficit at 6% of GDP and the trade deficit at record highs (most recently, US$55.5 billion per month).

When the US consumes so much from abroad, foreigners acquire lots of
dollars. They recycle the dollars into US assets, mostly paper "portfolio" assets like stocks and bonds but also real assets like real estate and whole companies (foreign direct investment, or FDI), thus "funding" the deficit.
So far, foreigners are not shunning either paper or real assets. On the contrary, incoming investment in the US is still at a very high level on a cumulative, year-to-date basis, up 28% from through the end of October from the same period the year before. It's true that the October monthly inflow fell short of the monthly average, and if portfolio inflows continue to go down, the trade deficit would be "unfunded." But this isn't a crisis, either. The government has two instant solutions - it can print money, or it can raise interest rates to the level that induces more capital inflow. There is absolutely no doubt that the Fed would make an emergency increase in interest rates if there were a run on the dollar. And, as a last resort, it could
decide with the Treasury to intervene in the markets.

The need for foreign funding can be softened by three routes, all of
which are targeted by the Fed and the Treasury.

#1 is raising exports, something a cheaper dollar is already achieving.
A falling dollar also makes imports more expensive, helping to bring
exports and imports back into equilibrium.

#2 is to raise the level of US savings to replace foreign investors.
Today, the combined savings of business, government and individuals
is a shockingly low 0.2% of income.

Higher savings are induced by incentives and higher rates of return. The
Bush administration promises both, and the Fed is accommodating by
raising interest rates-but gradually, so as not to choke off economic
recovery.

#3 is to banish the 800-pound gorilla from the living room. The gorilla
is China, and it refuses to play by free-market rules, tying its
currency to the dollar and refusing to let it trade freely in
international markets.

China accounts for more than 30% of the US$55 billion monthly trade deficit, and that share is rising fast. Given the differences in the standard of living between the US and China - the average yearly income in China is US$1100 vs. US$38,000 in the US - the US can never compete with China on many goods. But Greenspan and Snow don't want to let them steal the US economy by using a false exchange rate as well. When will China revalue its currency? No one knows for sure. The deliberate US dollar devaluation policy is making the Europeans and Japanese scream about "burden-sharing," and thus to put their own pressure on China. For that reason, we'll probably get the Chinese
revaluation in 2005. However, in the end, what will save the dollar is restoration of more equal terms of trade plus increasing inflows of FDI. That's because the US remains one of the best countries in the world to own real
assets - low regulation, flexible labor force, no price controls, etc.

FDI saved the dollar in 1995 - remember the Japanese buying Rockefeller Center? - when the inflow of foreign direct capital rose to more than offset a shortfall in portfolio investment. And it will do it again. Indeed, it's already starting to happen: the FDI inflow in the third quarter this year turned positive for the first time since 2001. The net inflow was only US$9.6 billion, but that number could grow dramatically as the falling dollar makes US real assets appear cheap in terms of yen, euros and other global currencies.

The bottom line is that the dollar is falling, and is likely to fall some more in 2005. It will be a choppy path down, though, because currency traders will be taking profits on much smaller movements. So, while for now you can still profitably invest against the dollar, at some point, the trend will reverse, just like it did in the 1994-95 dollar crisis. The combination of a weaker dollar, higher savings rates, increased FDI and China being lassoed into behaving like a mature global sovereign will eventually turn the tide.