Is the dollar exchange rate an indicator of impending recession?

18-Apr-2007

In news which may interest first time home buyers concerned about the stability of house prices and mortgage rates, an expert has raised the question of whether the return of the $2 pound signifies a forthcoming recession for the UK economy.

According to Fidelity International, there are a number of historical correlations between a $2 exchange rate for the pound and economic difficulties for the UK, which may be important for would-be first time buyers to bear in mind.

To find out about the different ways of financing a first home, see our section ‘Affording Your First Home’.

However, Fidelity believes that there is little to indicate a forthcoming recession in the UK over the next two years and that China will act as a countermeasure to any inflationary forces.

"China is expected to remain a deflationary force in the global economy for some time yet, having amassed excess capacity in a range of industries from steel to automobiles," said Michael Gordon, chief investment officer for Fidelity International.

Previously, the $2 breach occurred in 1981, when a recession was linked with global stagflation and later in 1992 when the government of the day struggled to keep the UK within the European Exchange Rate Mechanism (ERM).

The ERM was established in 1979.

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