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Posted - 09 November 2007 : 10:41:46 Global downturn fears as dollar falls again
The pound surged against the dollar again today amid renewed worries about the state of the global economy.
For the first time in 26 years, the pound was worth more than $2.11 following gloomy comments on the outlook for the US by the all-powerful chairman of the Federal Reserve bank, Ben Bernanke.
In a key speech last night, Mr Bernanke warned that the US economy would be damaged by the crisis in financial markets.
Mr Bernanke said US economic growth would slow noticeably in the coming months and through the first half of next year. His comments led to renewed expectations that he would bring about a further interest rate cut in the United States.
The news sent investors fleeing from the dollar overnight and this morning and the currency tumbled across the world early today.
The stricken dollar is making life extremely tough for British businesses attempting to export to the US and other countries whose economies are closely linked to the dollar. The currency's weakness means even Chinese goods are becoming too expensive for many American consumers.
China's manufacturers are, therefore, diverting them to the UK and other European markets, making life even tougher for British businesses.
Most high street retailers are bracing themselves for a bloody run-up to Christmas as consumers tighten their belts. Next said yesterday that last month had been particularly bad and even Marks & Spencer - one of the winners on the high street - is cautious about Christmas trading.
Consumers are under pressure because around three million borrowers are facing big increases in their mortgage bills over the winter as cheap fixed-rate deals taken out in 2005 and last year come to the end of their lives. At the same time banks are curbing their lending with the proportion of credit card applications that are rejected rising to as much as 50%.
Jonathan Loyne of Capital Economics said: 'The trigger for a serious downturn would be a sharp deterioration in the housing market.
'That would prompt home owners to tighten their belts and stop spending. If at the same time the pound comes back in value then that would hinder the Bank of England cutting interest rates because of inflationary fears.
'The good news is that the last time we had a slow down in 2004 none of that happened. The bad news is that all the imbalances in the economy are bigger now than then and arguably the global environment is less supportive.
'Also there are bigger inflationary worries because of the oil prices.'
The cost of a barrel was up 33 cents at $93.12 today, close to its record highs.
London shares held off from a further sell-off but only because of the excitement caused in the City by yesterday's surprise £60bn takeover bid for mining giant Rio Tinto by BHP Billiton.
