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Investment view

There is rather too much going on in the financial world at present. Aside from more sets of company results than you can poke a stick at, bids are coming thick and fast, the great and the good of politics and central banks are standing up to have their views counted and absolutely everyone has an opinion on which way markets will travel. As is so often the case, there is too much information around. But the one thing that you cannot do in this business is ignore what the central bankers are saying.

It was an interesting coincidence last week that saw the Governor of the Bank of England and the chairman of the Federal Reserve Bank pronouncing on their respective economies at pretty much the same time. Alan Greenspan was delivering his testimony to Congress. Mervyn King had the task of presenting The Bank of England&#39s quarterly inflation report. The similarities between what these two eminent men had to say was nothing like as interesting as the contrasts.

The good news is that both confirmed that the pace of economic growth was building. In America, fuelled in no small measure by the fall in the value of the dollar, 2004 looks like producing the strongest set of numbers for some time. But this is where one of the critical differences between the American experience and what Mr King is having to face surfaced. Despite robust numbers, there seems little prospect of an early increase in interest rates in the US. In the UK, on the other hand, all the signs are that we will be heading towards 5 per cent interest rates sooner rather than later.

Part of the difference in approach can be put down to the very different experiences in the labour market on either side of the Atlantic. The Bank of England&#39s report coincided with the publication of employment data suggesting that the number of people out of work has fallen to its lowest level since comprehensive records were first compiled some 20 years ago.

In America, on the other hand, the number of people out of work remains stubbornly high, due in part to imp-roving productivity. Certainly, the US market may be building up a head of steam but not many new jobs are being created.

This produces an interesting conundrum for the central bank governor. If he raises interest rates to slow the economy, then he will certainly not improve the climate for employment. But if he keeps them at their present low level, then the slide in the dollar may well continue. Wall Street certainly greeted his remarks with initial enthusiasm. The foreign exchange markets, on the other hand, were pretty clear what the implications were for the currency.

While holidays in Florida and transatlantic business acquisition may look better value as a result of what is happening, there is an unfortunate side-effect to the dollar&#39s decline which is now becoming evident as the UK reporting season continues. Dollar revenue among the FTSE 100 companies is significant. Indeed, many companies declare their dividends in dollars. A dividend increase paid in dollars may not translate well once currency adjustments are taken into account. BP is a good example of this. It may have raised its dividend in dollar terms but sterling investors will actually receive less than last year.

This may have implications for income funds since a number of high-yielding areas, such as the resource stocks, will be affected in this way. At the moment, it looks set to get worse. The two-dollar pound may not be far away. It will also keep analysts busy. Currency swings provide an all too convenient cover for the burying of any bad news that emerges elsewhere. Never underestimate the importance of exchange rates.

Meanwhile, the introduction of a compulsory occupational pensions safety net is moving closer. Controversial in conception, it is likely to be hotly debated once it arrives. It will, of course, be the healthier businesses that have to bear the cost of bailing out those less financially secure. This will not be popular. Moreover, the American experience, where such a fund has been in existence for 30 years, hardly proves comforting. The deficit over there is estimated at many billions of dollars. Expect it to provide yet another stick with which to beat the Government as we approach the next general election.


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