UK hits dollar danger zone

US policymakers appear remarkably relaxed about the plunge in the dollar, which dropped to new lows against the pound and the euro yesterday.

The reasons for its decline are well-rehearsed. The American economy is in good shape, but low interest rates, combined with concerns over the twin budget and current account deficits, have sent the greenback plunging.

Unlike the Bill Clinton/Robert Rubin administration, which preached the mantra of a strong dollar, the Bush White House has been sanguine about a cheapening currency. Officials are banking on a nice, smooth decline to correct the double deficits.

What does it mean for us? The impact of a falling dollar on the UK goes beyond tourists being able to enjoy cheaper holidays in America. It makes investment in Britain a less attractive proposition for US firms, and will hit shareholders who receive dollar denominated dividends.

The pound is caught between a depreciating dollar and an appreciating euro. Exports to America will be hit, but that should be offset through our trade with the eurozone, which is much greater.

Interest rates in the US are likely to remain low, which might discourage the Bank of England's rate- setting committee from pushing through hikes here.

The key question is whether the dollar can avoid collapse. As Andrew Clare, financial economist at Legal & General, puts it: 'We need a lower dollar, the question is how quickly we get there. A dollar crisis is a definite possibility.'

Asian central banks have been content to amass vast reserves of greenbacks, but will not want to do so indefinitely, and a rush to sell could send the dollar into a tailspin.

So far, the dollar's fall has been an orderly one. The risk, identified by the IMF in its most recent world economic outlook report, is that it becomes disorderly.

Shares v Homes

THE received wisdom of middle Britain is that bricks and mortar are invariably the best investment. That view has come under assault recently, with experts suggesting that shares are likely to outdo the housing market this year.

If you compare the Nationwide house price index with stock market returns including gross dividends reinvested over the past 40 years, it appears as if shares have hugely outstripped homes.

But the national obsession with property investment is not as irrational as the charts might suggest. The Nationwide index does not take account of imputed rent - the money people would be shelling out to a landlord if they were not buying a home.

Nor does it take account of gearing. Banks and societies are not usually keen to lend people money to invest on the stock market. But mortgage borrowers can potentially notch up large gains on their homes on the back of a relatively small deposit - though, as thousands in the late Eighties discovered, the downside is the risk of negative equity.

The housing market may seem off-putting at the moment. Commentators are almost unanimous in predicting a slowdown in the rate of growth. Some, including hedge fund guru Crispin Odey and economist Roger Bootle, are convinced prices will fall. But on a long-term view, buying a house is still a pretty good way for most people to build up a store of wealth.

School for scandal

A COUPLE of City indices soared relentlessly upwards throughout the bear market: those tracking fraud and scandal. Financial News, the Square Mile's parish newspaper, has devised a scandal index that has soared 300% since 2001, while fraud has doubled. Crisis, fortunately, is down 57% since 1998 - although that was the year of the collapse of the Long Term Capital Management hedge fund, and the Russian bond default.

Purists might jibe that, because the indices are based on articles in the newspaper, they are more of a guide to what journalists enjoy writing than anything else.

But the Parmalat debacle has certainly set the scene for another bumper year.