Expert View: America is riding on the big dipper

Money talks money at Coq d'Argent. As I made my way to my table through the crowded City restaurant, it was easy to pick out the different tribes of the financial industry. The dealers shouting about "cable" (the dollar/ sterling rate); the analyst telling his boss he was worried about downgrading his US profits number; the fund manager gripping his hair as his client asked about performance. As I sat down, my friend offered me, "One guess what we're talking over lunch?" The greenback is suddenly the only game in town.

Money talks money at Coq d'Argent. As I made my way to my table through the crowded City restaurant, it was easy to pick out the different tribes of the financial industry. The dealers shouting about "cable" (the dollar/ sterling rate); the analyst telling his boss he was worried about downgrading his US profits number; the fund manager gripping his hair as his client asked about performance. As I sat down, my friend offered me, "One guess what we're talking over lunch?" The greenback is suddenly the only game in town.

One of investors' obsessions in the 1990s was how much of their money they should keep overseas. Many pension funds were pushed by advisers into running down their overexposure to UK plc on the basis that it was just one of many investment options open to them, and not a very attractive one in the long term. Diversification was all.

At the time, I argued this was dangerous thinking. Pension funds are now rightly focusing more on their liabilities, which is why so many of them are buying bonds. For some bizarre reason, though, they often ignore the still more basic fact that their ultimate liability - the payment of a pension to the likes of you and me - is one that must be made in sterling. The value of your assets and the income you obtain from them must match that sterling liability.

What made the situation even worse during the tech boom was that the bulk of the value in stock markets outside the UK was to be found in an overinflated Wall Street. So, investing offshore meant to many simply buying US assets. Client advisers (all too often American) were convinced that, when buying American, currency volatility was of limited significance, as had been "proved" over the past 20 years.

Really? The dramatic movements in the sterling/dollar chart in that period resembled nothing so much as the grand roller-coaster on Coney Island. Sterling appreciated sharply from 1985 to '88, before dropping significantly in '89 only to shoot up again in '90. Even more thrilling was the death plunge from $2 to $1.40 in '92. Just as bad for dealers' indigestion in the past few weeks has been the dollar collapse of some 20 per cent. The value of the world's largest economy bounces around like a dot-com IPO.

Why is the dollar now falling? President Bush's artificial pump priming ahead of the US elections is combining high levels of defence spending, tax cuts and low interest rates. The deficits are exploding. In the meantime, the fall in the dollar becomes self-perpetuating as higher import costs risk stoking inflation, while booming US exports put fuel on the fire. The problem affects everyone and almost everything you care to consider in global financial markets. That's why the tribes are chattering.

How low can the dollar go? The greatest bears, led by Goldman Sachs, are predicting we need a further 30 per cent devaluation. They even argue that this will do some good. I'm not sure sluggish continental Europe would agree. It is in danger of being pushed back into recession, at least in terms of exports. Americans are once more learning to love Californian wine and cars made in Detroit.

It may obsess the diners at Coq d'Argent, but predicting where the bottom is for the dollar is almost impossible. Currency markets tend to reflect direction of sentiment as much as economic reality. That Coney Island roller-coaster shows that when the greenback turns, it turns fast. We may carry on getting more dollars for the pound in the short term, but 2004 could be the year Mr Bush learns that old Thatcherite axiom, "You can't buck the markets."

Book that cheap Florida vacation while it lasts.

christopher.walker@tiscali.co.uk