London 3/11/07-There was some good news for the Dollar on Monday night. Abu Dhabi Investment Authority, a sovereign wealth fund, announced that it would invest $7.5 billion in Citigroup, the troubled US financial conglomerate. The investment represents about 5 per cent of the group and is almost enough to cover the losses it has incurred since summer. The market's interpretation was that if ADIA had enough faith in the US financial sector to make such an investment then the Dollar may not be in such bad shape after all.

Investors did not fill their boots with Dollars but the boost to confidence was enough to allow the currency to navigate safely through a series of less than wonderful US economic data. Consumer confidence fell to its lowest level since Hurricane Katrina two years ago. House prices fell by 4.5 per cent in the three months to September. Durable goods orders were down, existing home sales were down and new home sales fell short of expectations.

The market has become inured to a rate cut by the Fed next week. The debate is simply whether the cut will be a quarter- or half-percentage-point.

A knock-on effect of this confidence boost was to increase investors' appetites for higher-yielding currencies, among which Sterling is numbered. Whether the Pound will be quite so high-yielding by Thursday afternoon is open to doubt. A clutch of Monetary Policy Committee members gave speeches and interviews that did absolutely nothing to clarify opinions on this week's MPC meeting.  

The balance of opinion among analysts falls roughly 2:1 for the Thursday meeting with the majority expecting no change and a third looking for a rate cut. The MPC is not renowned for hanging around once it has selected a course of action. On the other hand, neither is it impetuous. Unless the committee believes that a slowing economy will take the pressure off inflation it will leave well alone. The control of inflation is after all its sole objective.

The month end probably accounted for the slackening of activity towards the end of last week. Expect liquidity to shrink further as we approach the end of the year. Banks and investors will try to keep positions as tidy as possible in order to be left holding the parcel when the music stops. It could mean greater short term volatility if they really pull the shutters down. Buyers of the Dollar can hope for a renewal of the Dollar's retreat but should protect themselves with a stop order.

Source: Moneycorp

 

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