STERLING EXCHANGE

Taranaki Daily News, 18 October 1927, Page 7

STERLING EXCHANGE

AN UPWARD MOVEMENT. msiTIONS EXPLAIN!':!). (From Our Own Correspondent.) Wellington, Oct. 17 Ever since the beginning of the month sterling exchange on the New York market has been tending upwards, and on October 10 sterling exchange was quoted 4.87 3/16 dollars. The Americans have thus to give more American money to purchase a given quantity of British money. This movement in the sterling exchange is rather remarkable, because at this time of the year Europe becomes very heavily indebted to the United States on account -of purchases of wheat,' cotton, petrol, etc., and it is usual to see a strong demand for dollars with which to pay for these goods. But apparently the indebtedness at the moment is on the part of the. United States, and there is in consequence a keen demand for discharge of this indebtedness. The new position arises from the fact that the United States lias been lending very freely to Europe, and soma portion, probably a large portion of the loan funds, is to be withdrawn from New York by the borrowers, and London is being made use of for the purpose. A New York bank, having to remit money to London, buys bills on London, that is bills that are payable in sterling. The New York banker gives the seller of the bill dollar currency and receives for the bill in London sterling currency. On August 4 he had only to pay 4.85 7/Bths dollars in New York for the fight, to obtain a pound sterling in London. On October 10 lie had to pay 4.87 3/16tlis dollars, so that sterling ex. change was at a premium, and more dollar currency had to be tendered for a given quantity of sterling currency. There were years prior to 1925 when the pound sterling could not be exchanged for more than 3.70 dollars, eo we see that a very great cSaxge has conic over the situation.

If the claims of the United States on Britain, and the claims of Britain on the United States, were equal exchange would be at par. This supposes the existence of an international currency, but as in different countries different currencies are employed the exchange does not in -raetiee take a! simple form. There is no means of ascertaining when demand and supply do balance; consequently it is impossible ever to know what the true par of exchange may be. As a substitute cambists have adopted what is known as the mint par of exchang?. This is obtained by 'establishing a comparison between the currencies of the countries concerned, based on tlie weight • and fineness of the gold contained in their respective standard coins. The pound sterling is 11/12ths fine 'gold, and the United States standard dollar is 9/10tlis fine. The limit par of exchange is 4.86 2/3rd dollars to the 1, or a dollar equals 49 5/lGd. Since the American bankers have to remit to London they are buyers of sterling exchange, that is buyers of bills payable in London in sterling. Owing to the. scarcity of sellers of sterling the price has advanced and 4.87 3/16ths dollars was being paid for tlie £ sterling. This is well above the mint par of exchange, and there is still room for further ad vance, but the advance cannot well go beyond 4.99 dollars. If the exchange rate reaches this point then American bankers would prefer to ship gold to London.

The exchange rate. 4.90 dollars, is the gold point, that is, it would be convenient to send gold across the Atlantic, and the rate is arrived at by adding the cost of shipping the gold. The costs would inelude boxes, bags, packing, cartage, freight, brokerage, insurance, commission ami interest on the amount for the period it is in course of transit. The big improvement that has occurred in the dollar exchange is of very great importance to those, who have payments to make to the United States, and among those who have to make largo remittances to the United States is the British Government, which must provide a huge sum half-yearly to pay the interest on the war debt. The British Government is at all times a seller of sterling exchange, or, what is the same/ thing, a buyer of American dollars. Just now the British Government get more dollars for fIOO than it could, say, two months ago, and that is a saving to the Britisli Exchequer, for less British money is required to buy a’-given quantity of dollars.