British business is being hit by a dual blow in the currency markets as the soaring dollar pushes up raw material prices while the plunging euro makes it harder for exporters to the 19-country eurozone, Britain’s biggest market.
Sterling fell against the dollar to a five-year low of $1.4710 yesterday while remaining virtually unchanged against the euro at €1.40, which is near to a seven-year high — an unusual pattern that some argue is the worst of both worlds for British businesses.
David Kern, chief economist with the British Chambers of Commerce, said: “British businesses are facing a squeeze as the sharp fall in the euro impacts on exports, while the rising dollar pushes up raw material prices.”
He added that the falling euro was the bigger concern, since the dollar’s rise was being mitigated by the fall in oil and food prices in dollar terms.
In the past month, the pound is up by 3.6 per cent against the euro and down by 4.5 per cent against the dollar.
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The differential is even more pronounced over four months, with the euro 8.6 per cent lower against sterling and the dollar 7.7 per cent higher. The dollar is being pushed higher against most currencies as money flows into the US in anticipation of a rise in official interest rates, possibly as early as June. The Federal Reserve will give clues to its latest thinking on rates next week.
The euro is sliding as the European Central Bank, under its €1.1 trillion stimulus programme, pumps new euros into the wider economy by buying sovereign and other bonds, thus pushing down yields.
Traders were focused yesterday on the pound’s fall against the dollar after weaker-than-expected data on the UK construction sector and doveish comments on Thursday from Mark Carney, the governor of the Bank of England.
Output from building sites faltered in January, according to figures from the Office for National Statistics. Output was down by 2.6 per cent between December and January and by 3.1 per cent compared to January 2014.
Mr Carney said on Thursday that the strength of the pound was helping to keep inflation in check and might delay the moment when the Bank’s base rate would have to be raised.
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The diverging exchange rate is throwing up winners as well as losers: importers from the eurozone, exporters to the US and UK companies dependent on American tourists have received a boost.
British tourists heading for the Continent are also benefiting, while those planning holidays in America can expect their money to go less far. A beer on the Costa del Sol is 27p cheaper compared with a year ago, according to Post Office Travel Money, while a typical family meal out is £6.32 less.
The poor showing for the construction sector echoes a similar fall in manufacturing output in January and suggests that the overall GDP figure for the first quarter could be dragged down.
“There is a very real risk that construction output will contract in the first quarter of 2015 and be a drag on GDP growth, as it was in the fourth quarter of 2014,” Howard Archer, of IHS Global Insight, said. Construction accounts for 6 per cent of overall national output.
Housebuilding output was down 5 per cent compared with a year earlier, with both supply and demand dampening the building of new homes, the ONS suggested.
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Goldman Sachs yesterday was the latest bank to predict the eurozone currency would plunge through parity with the dollar within a year.