Category Archives: Financial Markets

Britain, Business, Economic, Financial Markets, Government, International trade, United States

The US dollar: down but not out

ECONOMIC

Intro: Reports of the declining status of the US currency have been greatly exaggerated

For economists, the impact of a falling US dollar and how that impacts Britain will be observed and monitored closely. Of interest will be why the dollar has fallen of late, what President Trump’s attitude is towards the US currency, and how that impact will be felt.

The dollar lost around 2pc during January against a basket of major currencies (as measured by the DXY index). At the time of writing, the DXY is close to a four-year low of 96.79 – a staggering 10.7pc lower than this time last year. This significant weakening of the dollar has been driven by US policy shifts, tariff uncertainties, and geopolitical tensions. It also, to a lesser extent, reflects global effort to “de-dollarise” led by China and other large emerging markets.

Just days ago, the Federal Reserve held its main policy rate at 3.5-3.75pc. But the US central bank previously cut rates by 25 basis points at three consecutive meetings – in September, October, and December 2025. Lower rates typically weaken the dollar by reducing its appeal to yield-seeking investors, prompting capital flight to higher-return assets elsewhere. Financial markets are anticipating one or two more US rate cuts in 2026, putting further downward pressure on the dollar.

Since Trump took office last January, Fed boss Jerome Powell has come under intense pressure to cut rates faster and further, with the President eager to stimulate investment.

Nominated by Trump during his first term and reappointed four years later by President Biden, Powell has resisted. He has warned of the dangers of US inflation – 3pc as recently as September and still up at 2.7pc, above the 2pc target. Trump’s announcement that he wants Kevin Warsh as the next Fed boss when Powell’s term ends in May has seen the dollar strengthen, given Warsh’s reputation as an inflation-fighting hawk. Warsh, however, is also son-in-law of Trump’s long-standing friend and billionaire donor Ron Lauder. It is doubtful whether he’d be the president’s pick without having pledged to nudge the Fed’s policy committee towards lower borrowing costs – so the pace of rate cuts could quicken, putting more pressure on the dollar.

In theory, Trump’s tariffs should have bolstered the US currency by reducing imports and improving the US trade balance. But the scale of the measures announced on “Liberation Day” in April 2025 instead contributed heavily to the dollar’s fall in value.

The president’s measures – initially hiking average effective tariffs from 2.5pc to 27pc within a month – sparked market turmoil, including an asset sell-off that pressured the US currency. Direct retaliation from major trading powers including China and the EU further eroded investor confidence and prompted US capital outflows. Trump’s tariffs, while they are less punitive than first announced, have combined with broader macroeconomic concerns – including the rise of America’s debt from 100pc to 125pc of GDP over the last decade – to drive considerable “sell America” outflows to other major currencies.

While the related dollar weakening has aggravated US inflation, a cheaper currency helps US exporters, not least “rust belt” manufacturers that are a priority among Trump’s “Make America Great Again” (MAGA) movement. That’s why many are inclined to think the president wants the dollar to keep on falling.

Trump has fuelled these concerns, pointing to the “great valuation” of the sharply depreciated US currency. There are suspicions the White House initially made its maximalist tariff demands not only as a bargaining ploy, but to strategically devalue the currency. The president’s dollar stance is nuanced – and often contradictory. He values “reserve currency status”, which sees the dollar demanded around the world both for payment transactions and a store of value. That supports the US currency, allowing America to run looser monetary policy without the inflationary impact of a dangerously weak dollar. Nonetheless, Trump has also shown willingness to tolerate and even encourage dollar depreciation for export gains (given his emphasis on appealing to blue-collar workers). Talk of the dollar’s demise, and its loss of reserve currency status, is, without doubt, overdone. The US currency still accounts for about 60pc of global foreign exchange reserves and almost 90pc of global transactions by value, underscoring its entrenched role.

Quite clearly, as the dollar has weakened, certain “safe haven” currencies have gained, with the Swiss franc up 13pc against the dollar during 2025. And despite its recent volatility, gold has soared from around $3,100 to over $4,900 an ounce since April 2025, such has been the impact of Trump’s “shock and awe” tariff announcement and the escalation of geopolitical tensions ever since.

When it comes to pound sterling, and the broader UK economy, a weaker dollar delivers a mixed offering. Benefits in lower import costs and inflation are offset by challenges for exporters, investors, and multinational firms. Since Trump’s second term, the pound has strengthened around 12pc against the dollar, from roughly $1.23 to $1.37. This makes dollar-denominated imports cheaper, reducing costs for US goods and dollar-priced commodities like oil.

And while the UK remains an inflation outlier, with a headline rate of 3.4pc in December, up from 3.2pc the previous month and higher than other G7 nations, domestic price pressure would have been even worse were it not for a falling US currency. Tourists and businesses travelling to, or dealing with, the US have also gained, with pounds stretching further abroad.

Yet the downsides are significant, particularly for UK-based companies with substantial US exposure. British-based exporters to the US have found their goods more expensive in dollar terms, undermining competitiveness and demand – especially amid US tariffs that add further barriers.

Overall, while a weaker dollar has flattered the value of sterling, and helped keep a lid on UK inflation, it has also exposed many of the UK’s structural weaknesses – a trend that looks set to continue.

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Banking, Britain, Economic, Financial Markets, Government, Politics, Society

Financial deregulation of the City: too risky by far

BRITAIN

THE UK Government has launched a consultation about whether it is time to lighten the rules governing alternative asset managers, including private equity and hedge funds, in the belief that doing so will boost growth.

That is radical because, in its desire to ensure the City of London remains attractive post-Brexit, the government seems to have forgotten one of the major lessons of the 2008 financial crisis: when regulation is lax, risks accumulate. And there is little evidence to support this idea, but every reason to think it could exacerbate systemic risks.

The proposal is consistent with the Treasury’s belief that expanding the financial sector will deliver economic prosperity. It has suggested that post-crisis regulations went “too far”. Those regulations included an EU directive targeting alternative investment funds. Before 2008, these funds operated mostly in the dark. There was no means of systematically tracking the leverage they were using, nor the dangers this might pose.

Under the EU rules, leveraged funds managing Euros100m or more in assets had to comply with strict reporting requirements and hold enough capital to absorb losses. The Chancellor is now considering lifting that threshold to £5bn, which would exempt many funds from the full list of EU rules. It will fall to the Financial Conduct Authority to decide which rules to apply. This is troubling.

The FCA has been instructed to encourage financial “risk-taking”, and the regulator has boasted about slashing “red tape”. Taken together, this sounds like a recipe for recklessness. Though the marketplace for private equity and hedge funds was too small to cause a crisis back in 2008, it has since tripled in size. Many private equity funds have started borrowing from shadow banks, which aren’t subject to the same regulations or capital requirements as normal banks. Others have begun taking on even more debt than usual. The Bank of England raised the alarm about these risky practices in 2023, and has suggested that mainstream banks may be unwittingly exposed to the industry. Hence, these are reasons for more financial oversight and discipline, not less.

If the FCA loosens the rules, fund managers will be less constrained in their dealings. They lobbied to have the EU directive watered down in 2010, and the UK was one of the few countries to oppose the rules. Then, as now, the government wanted to protect the City, believing it to be a goose that lays golden eggs. This antipathy towards financial regulation was a prelude to the “Singapore on Thames” worldview promoted by Brexiters. Hedge fund and private equity managers donated heavily to their cause: a study of Electoral Commission data by the academics Théo Bourgeron and Marlène Benquet revealed some £7.4m was donated to the leave campaign, as opposed to just £1.25m for remain.

The Treasury seems to be of the belief that unless the City gets what it wants, Britain may lose its fund managers to countries such as Luxembourg. There are many reasons to be wary of liberalising finance. One is that it will hinder, rather than help, economic growth. Research suggests that once the sector exceeds a certain size, it starts to become a drag on growth and productivity. A study from the University of Sheffield found that the UK lost out on roughly three years of average GDP growth between 1995 and 2015 thanks to its bloated financial sector. Watering down regulations might be helpful for fund managers who like to take huge risks, but it is hard to see who else would benefit.

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Britain, Economic, Financial Markets, Government, Politics

Spring statement 2025: A stage built on myths

BRITAIN

BRITAIN is tightening its belt. The chancellor’s spring statement arrives with the gloomy tone of inevitability. Welfare payments for the sick and disabled will be shrunk, and public services from transport to criminal justice face much leaner times. The language is that of necessity. There is no money. The choices are hard, but unavoidable. So runs the rhetorical script.

The notion that painful cuts are inevitable is political theatre and grandstanding. Either Rachel Reeves knows the constraints are self-imposed – or, more troubling, believes they are real. Last October, she announced £190bn in extra spending, £140bn in additional borrowing, and £35bn more in taxes than previously forecast. The Treasury has expounded upon this by insisting “you can’t pour that amount of money into the state and call it austerity”.

Yes you can. Particularly where tens of billions are siphoned off in debt interest to uphold economic orthodoxy rather than meet social needs. The UK now spends more than £100bn a year on debt interest not because it is financially insolvent, but to a substantial degree because the Bank of England is offloading vast amounts of gilts, bought during quantitative easing, at a loss. The Treasury must cover these losses, while the flood of gilts into financial markets drives up interest rates on new borrowing. This is quantitative tightening (QT), with the state left to foot the bill for soaring interest costs and Bank payouts. Nonetheless, the Office for Budget Responsibility assumes that it will continue, locking in high costs.

This is ideology posing as policy. And it’s far from prudent. No money for free school meals or youth clubs, some parliamentarians warn, yet billions pour into the pockets of bondholders, for the sake of “stability”. Ending QT could redirect that money to public services – a better priority than reassuring markets with symbolic gestures.

If the Bank won’t stop on its own, it must be pushed. Under Gordon Brown, the Central Bank gained its independence in 1998 but included a safeguarding caveat: in “extreme economic circumstances” ministers can override the Bank in the public interest. If £100bn in spending isn’t extreme, what is? QT should be paused. The Bank stands alone among G7 peers in actively selling bonds and demanding Treasury cash to cover paper losses. This is self-defeating in a dangerously volatile world. Gilts could be strategically managed. Before New Labour, Kenneth Clarke often ignored the Bank’s advice – and was often right. But such thinking is now deemed heretical in a political culture that treats Central Bank independence as sacred, even when it deepens and exasperates public hardship.

The deeper irony cannot be lost on anyone. The chancellor refuses to raise taxes on the wealthy, will not relax her fiscal rules, and has ruled out borrowing more. So she claims that there is no alternative to cuts. Yet, these are self-imposed constraints – combined with deference to an unelected monetary authority – that sustain the illusion of necessity. Labour has been here before: Snowden did the same in the 1930s, and very nearly destroyed his party.

The spring statement is a performance. She asks the public to accept a diminished state as the result of external forces, when actually it’s the result of internal dogma. Worse, she may believe the script – failing to recall the economic tools once used to steer interest rates, debt, and public investment. Austerity isn’t the price of prudence, but the cost of forgetting. We have a chancellor of the exchequer who wears the mask of making tough decisions, but on a stage built on myths. The better choice would be to trim the Bank’s power, even if the spotlight has been carefully trained away from its damaging role.

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