Doubts about the dollar

THESE are volatile times. UK shares surged 156 points in a sudden wave of optimism, bond markets saw a huge sell-off and the dollar fell sharply.

The drop in bonds pushed two-year yields up to 4%, so that the market is no longer forecasting a UK interest rate cut. Since a reduction would signal further economic distress, that is a hopeful sign. It is nice to see some optimism after a summer of gloom. It could evaporate just as quickly, but enjoy it while it lasts.

The dollar's troubles look more deeply rooted. It was surprising how quickly it rebounded from its fall below euro parity last month, pushing the euro back down to 98.4 US cents. That was partly due to the old familiar doubts about the Continent's sluggish economy. But euroland, whatever its sclerotic tendencies, pays its way in the world.

The US has emerged from the excesses of the boom years with a truly heroic current account deficit, nudging £300bn a year, or 3.5% of gross domestic product.

HSBC's currency strategist David Bloom says: 'The rest of the world is financing American consumers to buy more cars.' Crunching the numbers on how the deficit might be corrected, his findings are striking. To cut it by 2% of GDP, 'the dollar would have to halve in value'.

Unthinkable. As soon as the dollar falls, the Japanese authorities intervene to stop the yen rising and choking off their fragile hopes of economic recovery. Japan has already spent an astonishing £40bn to keep the yen down. Clearly the dollar will not halve. US industry is holding up, but the huge trade gap will have to narrow. Bloom says: 'In real life, we will have a long spell of slower US growth and a weak dollar.'

HSBC expects the euro to move back above $1 soon, hit $1.05 by year end and $1.10 a year on, rising from 64p to 67p sterling. We have seen these forecasts for the euro before, but it has remained a serial underperformer. Another cloud is looming. The astute Stephen Lewis, at Monument Derivatives, has been pointing to the growing strains on the EU's fiscal stability pact from Portugal, France and Italy (to name but three).

HSBC says a net £1,000bn of foreign capital has flowed into the US since 1996, based on the assumption that US bonds and shares would outperform. Those assumptions have been rocked. Bloom says: 'The dollar will be under constant pressure.'

Fortunately, sterling looks well placed to ride out the storms. Over 10 years it has been the most stable major currency, says the British Management Data Foundation. Our heavy exports to the US mean the weakness of the euro has been less of a problem than it seemed. With almost everything else looking volatile, a little stability goes a long way.

Motoring ahead

THE more imported cars Americans buy, the happier Trevor Finn gets. Pendragon. the motor dealer he runs, sells Jaguars in the US. Last week, its Hollywood dealer played host to a star - the Union Jack-painted XK8 model featured in the new Austin Powers film Goldmember. The movie has helped to double Jaguar's US sales.

Back home, car sales are running 6% ahead, defying fears of a slowdown. Pendragon sold £1bn worth in the half to June, with pretax profits up one-sixth to £15.5m and dividends up 8% to 5.7p. Motor dealers' shares are a well-kept secret. Pendragon rose 15p to 305 1/2p, only eight times forecast full-year profits. The dividend yield is 5.5%. With plenty of sales growth coming through, surplus property to be sold, and share buybacks to boost earnings, these are cheap ratings.

Downwardly mobile

IF YOU are going down, go with a bang. The £22.5bn mobile companies splashed out on UK licences for 3G phones looks the corporate equivalent of the Charge of the Light Brigade. They went on to charge all over Europe, running up a £65bn phone bill. Will they ever make a return on this vast investment? Forget it. Some have already given up the struggle. A Datamonitor survey suggests that customers are reluctant to pay up for 3G phones, so the industry will carry on with its bad old habit of selling them at a hefty loss.

Apart from email, there is no sign of a product to win over a sceptical public en masse. There are niche services, but Datamonitor's Nick Greenway says: 'It takes a great many niches to make a market.' Mobile phone economics will one day have to enter the real world.