Foreign Exchange Specialist Moneycorp report that the Dollar fell back in a game of three halves. Sterling remained steady on Monday and Tuesday, remaining within a cent of its $1.9850 opening level. It moved ahead until Friday, peaking above $2.0150, then slid lower in quiet trading over the bank holiday. It opened in London this Tuesday at $2.0050.


The US Dollar's principal problem last week was that investors had less reason to buy it. After the Federal Reserve had shown its readiness to take command by doling out liquidity and cutting its discount rate the global panic that began a fortnight ago morphed into a global uncertainty. Investors' confidence levels improved from 'terrified' to 'uncomfortable'. The hot money that had been ploughed into US treasuries because there was nowhere else for it to go, started to make its way back out into the big wide world. The States had little to offer in the way of economic data. The most interesting figures came on Friday afternoon.

 

Durable Goods Orders were respectable and New Home Sales went up in July rather than plummeting to the thousand-year low that some economists had forecast. When this Monday's Existing Home Sales fell by less than expected investors had to moderate their jaundiced opinions of the US residential property market and, therefore, the US economy as a whole. They started to wonder if there might be life in the old dog yet.

There was a bit of a wobble for Sterling when it came to light that Barclays had borrowed money from the Bank of England's Standing Facility. Like the Fed's Discount Window the standing facility is only used in extremis because it attracts a one percentage point interest premium over the Bank Rate that guides interbank lending and borrowing. Any concern dissipated quickly when it transpired that the trade was simply because an incoming payment to Barclays had missed the Bank's cut-off time. Otherwise the Old Lady maintained the low profile that has kept it below ground during the last couple of weeks. Nobody knows what will happen to interest rates next week when the MPC holds its monthly meeting. The MPC's members are probably equally unsure and will not doubt appreciate the fact that they have another ten days to think about it.

So what to do?

The short term outlook for currencies is made more difficult by three wild cards in the interest rate pack. Sterling and Euro rates may or may not go up next Thursday and US rates may or may not go down on or before 18th September. Having said that, the Dollar is almost certainly on a divergent course from that of the Europeans. Absent a resurgence of panic his ought to mean an upward bias for Sterling against the Dollar.

Buyers of the Dollar should remain hedged and look for more favourable prices in the weeks ahead.

 

Source: Moneycorp

 

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