Purchasers face a long wait to cash in on weak dollar

14 December 2006
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14 December 2006 | Paul Snell

UK purchasers may have to wait before they are able to capitalise on the strength of the pound against the dollar, according to economists.

The value of the dollar against the pound has fallen over the past few weeks and, as SM went to press, one pound was worth just under two dollars, the strongest rate for 14 years.

But as consumers rush to the US to capitalise on cheaper prices, it might be some time before buyers can realise savings from goods they purchase.

"The impact of US prices being cheaper may not feed through immediately," Lai Wah Co, principal economist at the CBI, told SM. "It would be better for business if the dollar weakens further.

"Once contracts start to run out and need to be renegotiated, that's when we might start to see the impact."

Yet there may be a bonus for purchasers who import goods from Asia and other low-cost areas whose currencies are linked to the dollar.

"The weak dollar has bigger benefits for those who source from Asia," said Steve Pearson, chief currencies strategist at HBOS. "Many of the currencies in that region, such as the Chinese Yuan, are linked to the dollar, so sourcing from Asian bases is now cheaper."

Co agreed: "Buyers will certainly benefit from goods that come from those countries. It is particularly welcome in terms of energy and commodities because it will help to offset the recent high input prices."

Pearson said the real question was whether reduced prices would be passed on to consumers, or simply absorbed into bigger profit margins.

A weak dollar will also have consequences for UK businesses exporting to the US, because a strong pound will make costs higher for UK business. Co said European suppliers might cut their prices in an attempt to regain some competitiveness against cheap prices from the US and Asia.

But Pearson said that, with the euro also strong against the dollar, this might be difficult. "Prices in Asia are so much lower than those in Europe that any kind of reduction wouldn't make much difference."

Buyers may be boosted by cheaper commodity prices but Pearson said it would depend on how risky it is to trade.

Last month an economic report from investment bank ABN Amro said that the strength of consumer spending and investment should see the US economy rebound in 2007.

SMdec2006

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