The impact of the exchange rate on trade was put into sharp focus with the depreciation of the US dollar in late 2003 and early 2004.

Such moves can constrain UK exporters by pushing up local selling prices, not only in the USA but also numerous other markets (particularly in the Far East) whose currencies, while not formally pegged to the dollar, nevertheless tend to track the greenback quite closely.

1993 - 2000

During the mid-1990s, UK exports rose strongly after the pound fell sharply following its unceremonious exit from ERM in September 1992.

Between 1993 and 1997, the volume of exports of goods and services expanded by almost two fifths. This competitive advantage, however, was slowly eroded in the late 1990s as the pound strengthened again.

Indeed, by 1998, the pound had regained all the lost ground and by 2000 the sterling trade-weighted index reached its highest since the early 1990s.

2000 - 2009

Apart from a period of weakness in 2003, the pound was relatively stable at this level from 2000 through to the summer of 2007, although in terms of individual currencies, appreciation against the US dollar was offset by depreciation against the euro.

From the summer of 2007 until the beginning of 2009, however, sterling declined sharply against both the euro and the US dollar as worries about the relative state of the UK economy began to influence foreign exchange markets.

At the same time merger and acquisition activity, usually supportive of sterling, dried up and there were also concerns about the state of the UK banking industry. As a result by December 2008, sterling had fallen by around 30% against both the US dollar and the euro compared with August 2007.

The currency then recovered somewhat but by July was still a fifth down compared with August 2007.

Source: ONS

In spite of the depreciation of sterling in the second half of 2007 and through 2008, export volumes fell sharply in 2007 and remained flat in 2008. It is clear that the weakening of the global market more than offset the competitive advantage provided by the falling pound.

At the same time import volumes also collapsed. Companies facing a protracted weakness in sales and wishing to conserve cash were keen to reduce stock levels. As a result the appetite for imported raw materials waned. At the same time, consumers worried about debt and unemployment and facing a squeeze on real income growth cut back on spending including imported goods.

Source: ONS

It would be wrong to assume a uniform response from British exporters to a shift in the exchange rate.

Manufacturing is a very broad-based collection of businesses and the impact of currency movements has a wide variety of effects. Those trading in price-sensitive commodities such as metals, chemicals and textiles, for instance, are especially exposed to currency movements.

Competitive pressures from emerging economies, such as China and eastern Europe, have also changed the way in which exporters market internationally.

Acknowledging that competing on price against such producers is an uphill task, UK exporters have sought to increase the ‘added value’ content of their products, moving away from a purely price-based strategy. This gives them a degree of price insulation, enabling them to withstand more easily unfavourable currency movements.

The costs of adjusting output and capacity mean that firms do not react immediately to changes in the exchange rate, particularly if they believe that movements in currency values may be temporary.

The increase in competitiveness following sterling’s departure from the ERM in 1992 was absorbed in re-building margins rather than lowering price to win more market share.

Therefore, companies were in a position to take a bit of a hit on historically high margins when sterling strengthened.

A strong currency is not necessarily a bad thing and a weak currency is not always advantageous. Indeed, it is the volatility and the speed of changes that are as much a problem as the actual level.

Businesses value stability and do not like surprises. A strong currency helps to keep inflation low and encourages companies to increase productivity.

As was the case in Germany in the 1970s and 1980s, a strong currency can act as a catalyst for change and place issues such as product marketing and branding that offer some protection against adverse currency swings, to the fore.

Germany was able to maintain international competitiveness with a gradual appreciation of the deutschemark from a level of DM12 to the pound in 1960 to DM3 in 1990.

It has to be hoped that British industry is able to deliver the improvements in productivity that will be needed to cope in international markets if the pound is sustained at its current level.

In any case, it is difficult to explain the weakness in manufacturing output by reference to the exchange rate alone.

The sector’s problems are more deep-rooted and it has not been performing well even in the domestic market.

The intensity of the debate surrounding what is an appropriate value for sterling may simply reflect an unhealthy preoccupation with the movements of the pound and a reluctance to consider longer-term issues at home, such as investment and productivity growth, that are perhaps more difficult to address.