25/03/08- Moneycorp the foreign currency specialists report on last weeks trading activity highlighting sterling and the US Dollar.  Having traded at $2.02 last Monday morning the Pound dipped two and a half cents before rebounding on Tuesday almost to $2.03. From there, apart from a brief hesitation early on Wednesday it was down again, this time to $1.9750. The long weekend kept things quiet until early this morning when the Far East market took Sterling back up above $1.99.

The main event of the week for the Dollar - if not every currency - was Tuesday's interest rate cut in Washington. The Federal Reserve failed to meet some of the more ambitious expectations but the 75 basis point rate cut that it delivered was far from a tentative gesture. The Fed reinforced its policy move by adding to the stash of cash that it has made available to unclog the credit markets.

Equity markets moved ahead strongly on the news; the FX struggled to make its mind up. An initial rally petered out and it was not until Wednesday that the Dollar really gained traction. By the end of the week the market had come to the conclusion that a) the Fed means business and b) it might just work Captain. Investors are still realistic about the slowing US economy and they are still concerned about the reluctance of lenders to lend but there is a growing perception that other economies and currencies will be feeling the pinch in due course.

Except for its losses against the US Dollar Sterling managed to rub along quite comfortably. There were not too many data to trip it up ands some of the numbers were encouraging, in the sense that they offered no reason for the Monetary Policy Committee to slash interest rates. Consumer Price Index inflation ticked up to 2.5 per cent, its highest level for 9 months. Average earnings ex-bonus continued to rise at an annual 3.7 per cent. The CBI Industrial Trends survey was much stronger than forecast. Surprisingly, UK retail sales built on January's 1.1 per cent gain with an almost equally impressive 1 per cent rise in February.

There was a moment of panic when investors got hold of the March MPC minutes. It was no surprise that David Blanchflower favoured a 0.25 per cent cut: That Deputy Governor John Gieve supported him was another matter. What made things worse was the perception that more members might have voted for a cut except that "back-to-back reductions might lead observers to think that the Committee was focusing on downside risks to demand at the expense of the medium-term outlook for inflation." [Translation: "We didn't want to spread panic."]

There was also consternation when a slump in HBOS's share price quickly infected other financials. Even though HBOS strenuously denied there was any substance to the rumours of its insolvency, such is the nervousness after Northern Rock and Bear Stearns that only the bravest investor is prepared to turn a deaf ear when alarm bells ring.

What to do?
Investors seem to have become more benign to the Dollar but no herd of bulls is yet to be seen. As long as the US Federal Reserve has to push ahead with its aggressive relaxation of monetary policy investors will not be unreservedly enthusiastic about the promise of jam tomorrow. Nor will they shovel their money into Sterling as long as they see the UK economy involved in a scaled-down version of what is happening in the States. With Sterling and the Dollar both looking uncertain, buyers of the Dollar should hedge half their requirement, selling Sterling forward to match expected payment dates.

 

Source: Moneycorp

 

More Currency Advice here