Currency converter regains forex faith

The dollar and yen remained softer, while the euro gained ground, after encouraging euro zone and US economic data and a higher open in stock markets helped investors' regain risk appetite.

Equities were helped by US retail sales figures that showed a 0.2 % monthly rise in October, in line with the market consensus. At the same time PPI was up only 0.1 %, below expectations for a 0.3 % rate.

The encouraging news helped further improve risk appetite among investors, who returned to selling lower-yielding currencies like the dollar and the yen in favour of the higher-yielding euro and commodities-based currencies.

On top of this, the euro was helped early yesterday by robust 3Q GDP data, which showed a 0.7 % quarterly gain for a 2.6 % yearly rate.

The data have powered up the euro against the dollar... and with central banks and sovereign wealth funds eyeing an increased allocation into euro-denominated assets, the latest euro zone releases continue to show no considerable drag on growth as has been the case in the US and UK.

Meanwhile, the Pound steadied out at significantly weaker levels against major currencies following a dovish Bank of England inflation report, which gave a clear hint UK interest rates will need to fall.

The BoE's inflation report forecasts showed that, if UK interest rates follow market expectations and fall to 5.1 % by the end of 2009, inflation will meet the BoE target rate of 2.0 %. If, on the other hand, interest rates stay as they are at 5.75 %, CPI inflation would undercut the target, coming in around 1.75 %.

November's BoE Inflation Report gives a clear signal that a series of interest rate cuts lie ahead. The timing of the move is uncertain, particularly given Tuesdays stronger-than-expected UK inflation data, but the dovish inflation report will spark talk that a move could come before February.

The Pound plunged against the dollar, yen and euro following the report as investors adjusted their expectations for UK interest rates.

The European single currency, in particular, hit a four-year high low sterling of 1.4010 The European Central Bank is not expected to cut interest rates for some months as inflation remains significantly above target.
Prices at the London open
GBPUSD – 2.0592
GBPEUR – 1.4025
EURUSD – 1.4679
GBPJPY – 229.28
GBPCHF – 2.3093
GBPAUD – 2.2910
GBPCAD – 1.9839
GBPZAR – 13.4263

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