Enjoy the pound's strength while it continues

Exchange rates are becoming a vital ingredient in investment decision-making. After the burst of strength in the dollar, which is unlikely to be reversed while further hefty increases in the official interest rate are expected, the trend of sterling, the euro and lesser currencies needs watching.

Holiday travel to the continent should be more pleasurable than for many a year and currency funds run offshore by leading banks and fund managers may be back in vogue.

Individual governments are powerless to rectify exchange rates, though chancellor Gordon Brown now recognises that the present pound-euro exchange rate is unstable. Strong economies and good government command a firm exchange rate. Market forces provide the support. Flights from a currency are the penalty of corruption and incompetence.

In recent frantic weeks, the ebb and flow in and out of high technology issues has been the worldwide feature of share markets. But the avoidance of less developed countries with serious political problems, overpopulation and natural or man-made disasters is the key to investment success.

The only really strong share market just lately has been China. It combines size and potential with the wheeler-dealing free-market philosophy of highly developed Hong Kong, itself now on the rack of a strong dollar and rising borrowing costs. Government stocks and bonds have been hit this week, so only safe and older economy shares in the right countries show resistance.

The long depression in consumer and engineering issues in the UK has brought a surge of takeovers and management buy-outs, involving sharp rises in share prices. Restructuring, including subsidiary flotations, amalgamations and some drastic cutbacks feature the continental and Japanese scene. Such moves are also extending to inflation-prone Latin America, partly under the influence of Spanish intervention. But fuel costs are a drag on many countries now that the oil price has sprung back close to its highest level since the 80s.

Inflation has become a factor to be allowed for in several countries and stock markets apart from the US. Ireland suffers from the effect of low euro interest rates on an economy that has been the fastest-growing in the west for many years, and some southern and eastern European countries are threatened. Productivity increases associated with the new technology help, but pre-emptive rises in interest rates are now the rule.

Falling unemployment still ensures rising consumer spending in most western countries. Germany has some way to go in this respect. The low euro enables high profits to be made on exports to the dollar area and UK. Returns on greatly increased overseas investment, particularly by France, Holland and, outside the eurozone, Switzerland, are also climbing. The euro is a good currency to borrow in order to exchange for one with a better interest rate. Its weakness arises because it is not yet the medium of exchange within any sovereign state, only the European Cen tral Bank having any responsibility.

Nevertheless, the combination of trade surpluses and sharply rising corporate profitability makes investment in successful continental companies one of the more attractive options at present. Whether the UK, can, uniquely, allow its manufacturing potential to fall in the hope that services, many of which are not internationally tradeable, will make up the deficit, must be highly improbable. If the new and often highly promising software and biotechnology firms that have offset the billions struck off the values of older manufacturing issues fail to make the grade it is difficult to see how the present belief in British success and stability can persist.

European funds are among the better performers as the modest recovery in the euro offsets falls in share prices from the recent peaks struck by some continental and Scandinavian markets. In the six months to March, growth of a third or more was common among funds with large French stakes. Some, like TR European Growth did better still through concentration on medium-sized but fast-growing companies, geared up by high borrowings. Specialists in small companies, notably Fleming European Fledgling and Invesco Continental almost tripled.

Meanwhile, a few emerging market funds achieved appreciation of around two-thirds, with Edinburgh Inca and F&C Latin America benefiting from the revival in Brazil, now in reverse. There was also a reduction in the high discounts on their shares. But risks are high as dollar interest rates rise.