Investors nervous about Sterling

  • 16 years ago
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17/03/08-Economic data from the UK presented a mixed bag. Industrial and manufacturing production figures kicked off the week with a reminder that activity is slowing. Producer prices were high enough to show that the Bank of England still has grounds for concern that inflation remains a threat. Although manufacturers are evidently absorbing much of the increased cost of materials and energy – up by 19 per cent in the year to February – they are not wearing it all. Factory gate prices went up by nearly 6 per cent over the same period.
The same is happening on the High Street. Retail sales grew by 1.5 per cent in the year to January but they did so only because retailers were prepared to slash prices. Prices were also lower in the residential property market. The RICS House Price Balance, which compares the number of agents reporting higher prices with those reporting price falls, came in at -64, its lowest level since the last big property slowdown in 1990.
But it was not the data that hampered the Pound, it was the markets’ vicious swing towards risk-aversion. The US Federal Reserve’s announcement that it would offer – in conjunction with similar moves by four other central banks – an extra $200 billion to help banks with their liquidity reminded everyone about what had happened to Northern Rock. Investors began to fret. On Friday they became more fretful when the Fed used JP Morgan as a conduit to bail out Bear Stearns. The Fed’s announcement that it was lowering the discount rate and making that “emergency” funding available also to non-banks might on a good day have been seen as a positive sign. But it happened over a weekend and coincided with JP Morgan buying the ailing Bear Stearns for a pittance. Even though all this took place on the other side of the Atlantic investors were not slow to spot the parallel between what’s happening in the States (falling house prices, slowing economy, falling interest rates, failing financial institutions) and what is going on in Britain.
The Dollar collected more unwanted records over the course of the week. Its trade-weighted value fell to a new record low. Euro/Dollar finished the week at a record high. The value of the Swiss Franc rose above US$1 for the first time ever. Dollar/Yen hit a 13 year low. It is a certainty that the Federal Reserve will lower its benchmark “Federal Funds” interest rate by a chunk on Tuesday. How much of a chunk remains to be seen but it had better be a big one, otherwise it will simply leave investors looking for the next move.
The US Secretary of the Treasury, Hank Paulson, appeared on television over the weekend, telling US citizens not to panic. He was prepared to admit that the US economy is going through a “rough patch” but refused to be drawn on whether or not it amounts to recession. He repeated earlier comments that a “Strong Dollar” is in the best interests of the United States. Investors are less sanguine. Many believe that a US recession is already under way and that the Dollar is toast.
What to do?
It is sobering to consider that Sterling only just managed to hold its position against the Dollar last week even though the world’s investors were bashing the buck with the biggest sticks they could find. Instead of following the Euro higher the Pound starts this week nervously eyeing a break back below $2. Buyers of the Dollar should hedge at least half their requirement.

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