$2 pound 'will knock exports for six'

British exports to the US, worth £29 billion last year, are expected to plunge as the dollar plummets on the foreign exchanges. With economists predicting that sterling could soon fetch $2 for the first time in 13 years, British goods aimed at the huge American market will become prohibitively expensive.

Roger Bootle of Capital Economics says the next 12 months 'could be terribly difficult for many British companies'. Bootle says it is quite plausible that exports of British goods to the US could reduce by between £2bn and £3bn. 'That is the equivalent of a reduction in GDP of 0.3 per cent, by no means inconsequential.'

In addition, British companies with large American offshoots will be hit when their dollar-based earnings are translated back into pounds.

Analysts say that drinks giant Diageo, Reuters, Royal Bank of Scotland and Vodafone must fear the worst. But the extent of the damage may be offset by hedging, a mechanism that allows companies to insure against currency volatility.

Last week, engineering group Tomkins blamed the weak dollar for disappointing third-quarter results. When Tomkins converted its US earnings into sterling, profits came in 13 per cent down on the same period last year.

Cadbury-Schweppes is also viewed as vulnerable: it has enormous US operations, employing thousands of workers. Ian McCafferty, chief economist at the Confederation of British Industry, says: 'The dollar is expected to fall by another 10 per cent from current levels. But 10 per cent equates to the profit margin enjoyed by many British firms. So there is a possibility that some companies will see their entire margin wiped out.'

If that happens, firms would have no choice but to cut costs, almost certainly by shedding labour. If unemployment rises significantly, it would spark fears of a recession.

McCafferty adds that there is little scope for British firms to make up lost ground in Europe because demand on the Continent is affected by an even sharper rise in the value of the euro against the greenback.

US groups enjoy a big advantage in Europe and Asia because 'in relative terms, goods denominated in sterling are more expensive than those which are sold for dollars,' says McCafferty.