My worry is that the pound may move up in a big way. I say "worry" because the weak pound is critical to the hopes for economic recovery... The pound seems particularly vulnerable to a rise against the euro, given the ghastly economic situation in the eurozone and growing pessimism about the policy response...As the world tries to cope with the ongoing economic crisis, it will be interesting to see to what extent countries cooperate with regard to economic policies versus whether they will strive to defend their own currencies at any cost to other nations. I have argued before in this blog that U.S. government policy will be to favor inflation over deflation, even if it means weakening the USD. I believe BBC radio recently had a podcast on the topic of battling currencies, but I can't locate it at the moment.
The authorities are currently considering the whole shape of economic policy, and the shadow Treasury team in the Conservative Party is doing the same. Everything is in the melting pot – as it should be...
The aim should be to tighten fiscal policy first and to raise interest rates last, in order to try to help the pound to stay down.
18 May 2009
Will we see a "battle of currencies" in the years ahead?
An interesting article at the Telegraph today, arguing that for the UK to experience an economic recovery, the strong pound needs to be held down.