Britain and the United States are not alone in experiencing this correction to property prices. Ireland saw falls averaging 7 per cent in 2007. Many EU countries report a slowdown. Prices in Japan have been going down since the early nineties. South Africa and New Zealand both face negative price growth. Yet none of these situations comes into the reckoning when the market is in the mood for currency-bashing. Sterling’s exchange rate is highly sensitive to the property market. The market believes that the British obsession with home ownership and the property ladder makes for a much closer link between house price movement and consumer activity than it does in, say, Germany where well over half the population chooses to rent.
The Bank of England’s decision to cut the Bank Rate by 25 basis points to 5 per cent was not a surprise except to some of the more ambitious forecasters who had been looking for a 50 basis point cut. Perhaps some of the reason was to be found in an IMF report setting out its expectations for the global economy. It sees British GDP increasing by 1.6 per cent this year and next. For the Euro zone the equivalent figures are 1.4 and 1.2 per cent. The average for developed economies is 1.3 per cent. To emphasise that comparison, the IMF expects the UK economy to grow more quickly than the Euro zone and more quickly than its peer group for the next two years.
The Dollar had a quieter week than usual. It did touch a new record low against the Euro but only by a handful of pips. The few data did not show the US economy in a particularly good light but were not enough to persuade investors to go for broke with short Dollar positions. Pending home sales fell again. The trade deficit widened despite the competitiveness of the Dollar: even with its currency at a record low the United States is still managing to import more than it sells abroad.
The week ended with Michigan University’s index of consumer sentiment hitting its lowest level for more than quarter of a century. To add insult to injury, inflation expectations were at 4.8 per cent their highest since 1990. Central banks take particular notice of people’s expectations for inflation because it is at least as important a driver of spending decisions and wage negotiations as the official indices. Such a high number will not be helpful to the Federal Reserve in its efforts to loosen credit and stimulate the economy.
The G7 meeting on Friday rounded off with a statement that paid more than the usual attention to exchange rates. As well as the regular reference to an undervalued Chinese Yuan G7 drew attention to a new worry: “Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.” The language was evasive but the implication seemed to be that G7 thinks the Dollar is too low. Whether they will do anything about it is another matter.
A week ago it looked as though the Pound would be able to consolidate around $2. Its performance since then casts doubt on that assumption. Buyers of the Dollar should hedge at least half their requirement, selling Sterling forward to match expected payment dates.
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