ALEX BRUMMER: Fiscal realities will hand pound revenge over dollar

Market reaction to the mini-Budget proved enough to drive a Chancellor and Prime Minister from office and led to one of the biggest fiscal U-turns of all time. 

It will almost certainly end with a Labour government. 

The attempt by Liz Truss to change the course of the economy with lower taxes and supply side reforms failed because she rushed the fences and sought to circumvent normal economic checks and balances. 

Looking ahead: Fiscal realities will catch up with the dollar and the pound will have its revenge

Britain, with four Prime Ministers in as many years, is making Italy look like a stable democracy. 

In spite of this excruciating experience, we should not forget that compared with most of the UK’s G7 allies, the public finances remain sound. IMF data show that the UK’s debt to national output (GDP) ratio is lower than almost every other advanced country with the exception of Germany. The notion that the UK should be assessed as an emerging market economy needs to be squashed. 

It is critical that whoever next becomes Tory leader and Prime Minister keeps a sharp focus on productivity, R&D, training a high-skilled workforce and growth. The market-driven events have been dangerous. The implosion of the liability-driven investment strategies at the heart of many pension plans and the jump in the cost of fixed-rate mortgages, has been destabilising and frightening. But it is worth bearing in mind that sterling crises are never forever. 

There is a terrible tendency to view the pound as a symbol of national virility when it is nothing of the kind. 

Recent turmoil has created both a trading opportunity for hedge funds and a chance for still unforgiving anti-Brexiteers to claim they were right all along. 

Markets turn on a sixpence, which is why it may be unwise for those coming to the end of a fixed-rate mortgage deal to lock themselves into 6 per cent, or whatever is on offer for five years. The value of the pound was flashed on Sky above pictures of Downing Street at $1.13, as if the whole nation should be on edge as Truss stepped down. 

Maybe, but it is way above the recent low point of $1.03 on September 26. 

The verdict from currency traders, strategists and other financial players is that the one way bet against sterling is already over. 

Yogi Dewan, of Hassium Asset Management, dismisses all the fuss about Liz Truss and a Labour government and says he is focusing on valuations.

Hassium is ‘buying sterling and bonds at the right price’ when the risk-versus-reward looks compelling. As Warren Buffett has opined: ‘Buy low, sell high.’ 

A variety of hedge-fund managers quoted on Bloomberg suggest sterling will recover over the next several years. 

Many argue it is time to buy beaten-up pounds and gilts. Indeed, the direction of travel is already there, with sterling up 10 per cent from its low point and gilt yields falling as buyers return. 

Vulpes Fund Management, based in Singapore, argues that when former US treasury secretary Larry Summers started talking about Brexit, it was ‘very revealing’ because it contributed to ‘irrational negative’ views about anything the Government does. It might have added a question as to why anyone should listen to Summers, who stepped down as president of Harvard under a cloud. 

On earlier occasions, when free floating sterling has hit rock bottom, the currency has shown great resilience. In 1985 it fell to £1.07 only to recover to $1.98 by February 1991. It stood at $1.53 in 1995 and came roaring back to $2.02 in September 2007 on the eve of the great financial crisis.

Volatility on currency markets is no stranger. Traders are currently transfixed by the Federal Reserve’s aggressive path to higher interest rates and US energy self-sufficiency amid the gas price shock from Russia’s war on Ukraine. 

At some point, markets will refocus on American political stalemate post next-month’s mid-term elections. 

President Joe Biden’s largely unfunded $2trillion Inflation Reduction Act, and cancelling generations of student loans, raise questions about US debt. As the world’s reserve currency, the US dollar becomes a safe haven in wartime – as is the case now. 

Eventually, however, fiscal realities will catch up with the dollar. The pound – notwithstanding the extraordinary turmoil on Downing Street – will, in the course of time, have its revenge.

This post first appeared on Dailymail.co.uk