UK: EXCHANGE RATES COLOUR THE INDUSTRIAL PICTURE.

UK: EXCHANGE RATES COLOUR THE INDUSTRIAL PICTURE. - Turmoil in foreign exchange markets has resulted in significant changes in the competitiveness of major industrial nations. Japan's experience has been the most dramatic as the yen has soared. (The char

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Last Updated: 31 Aug 2010

Turmoil in foreign exchange markets has resulted in significant changes in the competitiveness of major industrial nations. Japan's experience has been the most dramatic as the yen has soared. (The chart compiled by Schroder Economics compares trade-weighted exchange rates adjusted for relative unit labour costs). On this basis, the Japanese currency is over 40% higher than a year ago and the strain is beginning to show. At the other end of the spectrum the US should continue to benefit from a competitive dollar, and activity in the trade-orientated manufacturing sector should outpace that in the rest of the economy. European competitiveness falls between these two extremes. Germany has lost competitiveness since monetary union between East and West. In contrast, superior inflation performance and currency movements have steadily improved the French position. The UK is placed between Germany and France. Since leaving the ERM, sterling has returned to its 1987 level of competitiveness. However, following the UK's poor trade performance over the past five years the devaluation could be seen as a necessary correction to an overvalued exchange rate. It is still not clear that it will have been sufficient to deliver export led growth.

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