The pound soared to its highest level against the US dollar for 14 years yesterday, dealing blows to both manufacturers and high street retailers and worrying West Midlands business.
As economic storm clouds gathered over the American economy, sterling strengthened to just shy of $1.96 on the international money markets at one stage, its highest level since before Black Wednesday in 1992.
It means that #1-worth of goods from the UK now costs US customers getting on for $1.96 compared with $1.73 at the start of the year.
Analysts said the surge raised the prospect of a $2 pound for the first time since the UK currency crashed so ignominously out of the European exchange rate mechanism.
The strong pound/weak dollar equation is having twofold effect on the economy.
It is making British exports to the US – such as Jaguar and Land Rover cars – expensive in dollar terms at the same time as making goods cheaper for tourists converting pounds into dollars.
A flood of bargain hunters heading for New York in the run-up to Christmas is likely to hit the British high street.
The governor of the Bank of England, Mervyn King, conceded that manufacturers were finding it increasingly difficult to sell their products in the US when he appeared before the House of Commons Treasury Select Committee yesterday.
But he pointed out that although the pound/dollar exchange rate has been volatile recently, sterling has been level against the euro.
As a result, overall manufacturing conditions appear to be "pretty stable", largely because the euro zone is enjoying economic growth.
He noted that the pound's overall effective exchange rate – which measures sterling against a basket of currencies that weights the euro as three times more important than the dollar – had been steady for quite a long time.
Mr King said that while the US was a major market for UK manufactured goods, it was not as significant as Europe, which accounts for about half the country's exports.
Last year we sent #54 million-worth of products to the US compared with nearly #150 million-worth to the 12 eurozone countries.
That situation is reflected to some extent at Jaguar – a major dollar earner – which is hedging its dependence on the US as a major market by driving up sales in Europe and emerging economies such as China.
The euro yesterday shot to a 20-month high against the US dollar to trade at $1.3210 and reached 153.49 Japanese yen, its highest level against that currency since its launch in 1999.
The spectre of stagnating, or falling, interest rates in the US compared with rising rates in the UK and the eurozone has knocked about three per cent off the value of the greenback in the past week.
Birmingham Chamber of Commerce and Industry spokesman John Lamb said yesterday there was concern about the impact the strong pound was having on local companies.
"Exports to the US could be damaged just when things seemed to picking up. We will be watching the situation," he said.
Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said: "Weakness in the US dollar is potentially bad news for future UK corporate profits."
Steve Radley, chief economist at EEF, formerly the Engineering Employers Federation, said the most recent slump in the value of the dollar was not hurting exporters at the moment because order books were already full.
"However, if we did see a sustained period with the pound above two dollars it would start causing problems for manufacturers," he added. Fears over the US economy hit the London stock market.
The FTSE 100 ended sharply lower as shareholders took fright over the potential damage to earnings posed by the surge in the pound.