The dollar is in freefall. The pound has strengthened against it in recent days, as have most other currencies. The pound is even managing to rise a bit against the Euro, as people come to examine the banking problems and slow growth overhanging Euroland more intently.
It does not relieve all the inflationary pressures, however. The pound is still well down on its value a year ago, whilst commodity prices have been the main gainers from the money printing. Oil has more than doubled in a few weeks.
Economic news suggests the savage destocking of the winter is over. Now manufacturers will have to make a bit more to keep pace with much reduced final demand. Asia looks likely to perform better than the West.
The world’s major stockmarkets have risen well on the back of monetary easing and low interest rates. Investors want to take more risk. The Chinese have probably been buying more commodities, preferring real assets to ever bigger piles of US Treasury bonds. As usual, markets are moving well ahead of events in the real economies.
The question of financing the large public deficits of the USA, UK, Spain other leading western borrowers overhangs markets. In the last few days the yield on the 10 year US bond has shot up to 3.78% - it was down to almost 2% in December 2008. Both the UK and the US are experiencing some increases in the costs of government borrowing for longer periods of time, despite the substantial programmes of bond buying which the authorities have embarked on to offset the issue of new debt. The going will get tougher form here, once quantitative easing comes to an end.
We remain strongly of the view that investors should look to Asia rather than to the West for their principle equity investments. We will use this period of strength in markets, buoyed up by monetary easing, to switch more from West to East. The heavily borrowed countries will suffer slower growth and face difficulties raising the borrowings they need as monetary policy is tightened in due course. Sterling can benefit for a bit longer from dollar and Euro weakness. To correct the remaining large imbalances in the world economy the eastern currencies have to go up against the western ones, to reflect the greater competitiveness of Asian economies and to adjust the money flows.