Wise Money sees up and downs like a yo-yo

Sterling's rise following the split MPC vote on Wednesday was short lived as UK retail sales data for June released yesterday plummeted.

Sales fell in all but one sector, with clothes, shoes and household goods sales severely hit. The sharper-than-expected decline drove the pound lower as investors bet the Bank of England may have to cut interest rates to bolster the economy.

The Office for National Statistics said retail sales volumes fell 3.9% in June, the sharpest fall since records began in 1986, after an upwardly revised 3.6% increase in May.

Analysts were expecting a fall of just 2.5% and an annual gain of 4.4% but annual growth was just 2.2% compared to 7.9% last time. While the Bank of England has given little sign that lower borrowing costs are on the way, because inflation is running at its strongest rate in more than a decade, most economists think rates will need to fall eventually.

It was also bad news for the Euro zone with German business sentiment declining sharply. The Ifo business climate index fell to 97.5 from 101.2 in June, its lowest level since September 2005.

Also of concern to policy makers at the ECB will be the fact that both Manufacturing and Service sector PMI indexes also fell in June. Services PMI declined to 48.3 from 49.1 in May its lowest reading for 5 years while Manufacturing PMI dropped to 47.5 from 49.2 - readings under 50 indicate contraction.

It wasn't any better stateside either. The US weekly jobless claims jumped by 34,000 to 406,000 from 372,000 the previous week and new home sales were down 2.6% in June to record their lowest level for 10 years.

With the crucial US Non Farm payroll numbers due out next Friday the jobless claims does not bode well. Wall Street closed 283 points lower on the back of the weak economic data and the record losses announced by Ford. The car giant's second quarter loss amounted to US$9 billion as sales of trucks and larger vehicles plummeted.

US crude oil prices bounced a little from recent lows to close at $126.15 yesterday with Brent crude also closing up at $126.96.

The Aussie Dollar has come under further pressure following an announcement by the National Australia Bank that they have written off A$798m in credit market related losses thereby increasing speculation that the Reserve Bank will need to cut interest rates sometime soon.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

A three way split decision by the MPC gives sterling a boost

The Pound was pushed to a three week high verses the Euro following a three way split in voting by the MPC at their July policy meeting.

Tim Besley was the loan voice calling for interest rates to rise while David Blanchflower to no one's surprise voted for a rate cut with the remaining 7 members opting to leave rates on hold.

The last time there was a three way split in the voting was way back in May 2006 when the base rate was 4.5% and CPI inflation was 1.8%. The vote didn't come as a huge surprise this time because the market was expecting a hawkish outcome anyway given the level of inflation reported earlier in the month which was known at the MPC meeting.

However, it does illustrate the Bank's dilemma in trying to balance a slowing economy and increasing inflation.

The BoE in the minutes acknowledged such weakness in the real economy, noting GDP may slow more than forecast, while reiterating its warning that consumer inflation pressures were likely to be higher than expected.

The account of the meeting was largely in line with the BoE's recent stance on rates, and apart from Besley's stand, the minutes did not appear to be more hawkish than in the previous month.

Oil prices fell again yesterday following a report that US stocks of gasoline increased more than expected pushing U.S. crude down by a further $1.78 to $126.64. Brent crude declined by $1.95 to $127.60.

Also helping the dollar was the approval by the House of Representatives of plans put forward by the US Treasury aimed at supporting the businesses of Fannie Mae and Freddie Mac who between them own or guarantee about half of the U.S.'s US$12 trillion mortgage market.

The Beige Book held no real surprises by reporting that the US economy continued to slow through June and July that consumer spending was sluggish or slowing, manufacturing was in decline in most regions, bank loan growth was restrained, and the residential real estate market remained weak across most of the country.

It also pointed to continuing inflationary pressures with many manufacturers planning price increases to combat higher input costs.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling remains under pressure but manages to advance against a weaker Dollar

The Pound gained no rest bite yesterday as more bad news on the financial sector and property market deepened economic gloom.

Firstly there was HBOS who confirmed that shareholders subscribed for a mere 8.3% of shares in its rights issue, leaving the underwriters with almost £3.8 billion of stock.

Then we had property website Rightmove who reported its first ever annual fall in house prices since it began keeping records six years ago; prices fell 2% year on year to July.

Following comments from John Gieve and David Blanchflower highlighted in yesterday's commentary dealers will be looking very closely at the minutes of July's MPC meeting on due out on Wednesday to gauge whether any other members of the committee are moving towards easing monetary policy soon, which would further weigh on sterling.

A Reuter's poll of economists predicts that the MPC will have voted 8-1 in favour of rates staying on hold.

The dollar initially gained from news that Bank of America reported stronger-than-expected quarterly earnings but sentiment remains cautious and the dollar fell back sharply as poor company earnings reports in after hours trading from American Express, Apple and Texas Instruments triggered fresh dollar selling.

Adding too the negativity surrounding the greenback was a report yesterday from the Conference Board that showed that the index of leading US indicators fell 0.1% in June. This was in line with expectations but of more concern to traders was May's figure which was revised down to minus 0.2% from plus 0.1%.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money eyes on Europe.

This week the main focus of attention will be data released from Europe. The ECB has a rate decision on Thursday that may challenge the potential market movement of the US non-farm payrolls report.

Due to the shortened week in the US (Independence Day), Non-farm payrolls will actually be released on Thursday instead of Friday and should coincide exactly with Trichet's post meeting press conference.

A quarter point rate hike has been completely discounted by the market, although certain ECB officials have been at pains to state that this is not a foregone conclusion.

Ahead of the rate decision on Thursday in Europe we have consumer spending and employment numbers from Germany along with Eurozone producer prices.

In Asia trading we have seen Oil prices spurred by brewing Middle East tensions, climbing near Friday's record high $142.99 a barrel and weighing on Asian stocks, which posted their worst first-half year performance in 16 years.

The US dollar also fell to three week lows against the Euro following the surge in Oil and falling stock prices.

Fears about dwindling oil supply were already heightened when Libya's most senior oil official said last week he was studying the possibility of cutting output in response to U.S. threats to sue OPEC members.

The British Pound rose to a 2 month high, with housing market indicators, service and manufacturing PMI reports due for release this week and GBP/USD trading above 1.99, there is a strong chance that we may see a retest of 2.0.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

MPC Hawk Argues Slower Growth Will Dampen Inflation

Sterling fell against both the dollar and the euro on Monday subsequent to an interview which appeared in the morning press with Andrew Sentance, a member of the Bank of England's monetary policy committee.

Sentance argued in the interview that the combination of a weakening housing market, the credit squeeze and higher commodity prices is placing significant pressure on consumers which should slow economic growth and so, "€œHelp to offset the upward pressure we are seeing on inflation."

Whilst not disputing the risk posed by inflation, the comparatively dovish tone of Sentance's comments, particularly on the subject of rising pay demands, contrast with those made by Mervyn King and the Chancellor at last week's Mansion House dinner.

Sentance's views on slowing growth in the UK economy were supported by a report also released yesterday by Britain's most used property website, which showed that the average asking price a home dropped 1.2% during May. On the back of these factors, EURGBP reached 0.791 in early trading before eventually closing the day down 1% at 0.789.

The pound was also weak against the dollar, slipping to 1.9586 before mounting a slight recovery to end the day down 0.5% at 1.9644.

Following the release of two reports which illustrated that the eurozone may now also be suffering similar issues to those faced by the US and UK, the euro fell against the dollar closing at 1.551, down 0.6% for the day.

Firstly the German Ifo business survey supported the results of last week's ZEW index by reporting that business confidence within Germany has fallen this month to the lowest level since 2005.

The index reported that the sharpest decline in confidence took place within the heavy industry and manufacturing sectors and this was reinforced by data from the eurozone's Manufacturing Purchasers Index, which showed that the strength of the euro combined with high oil prices is taking a considerable toll on manufacturing.

Despite this, markets are still expecting the ECB to raise interest rates to 4.25% next month.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Unforeseen Rise in UK Retail Sales leads to Sterling rebound

A report released by the Office for National Statistics on Thursday showed a somewhat unexpected 3.5% rise in retail sales volumes during May, the fastest monthly increase on record and in stark contrast to the forecasted 0.1% downturn.

Year-on-year sales were up 5.4% with the growth driven by sales of food, despite soaring food prices and clothing, a sector in which recent declining sales had forced severe discounting amongst retailers.

The British Retail Consortium attributed rising sales on a period of good weather and whilst analysts differed in their explanations, most were in agreement that the figures do show a higher level of resilience in the UK consumer than had previously been expected.

Although it is widely known that the BOE places greater importance on business surveys, the ONS is still significant as it demonstrates that rising food and energy prices and problems in the housing market have yet to fully impact on consumers.

Today's report could provide further support for the MPC to keep interest rates on hold for the time being and comes on the back of the governor's increasingly hawkish comments in reference to rising inflation.

It is of course important to recognise that yesterday's data is just one stat on one month and so must be taken in context.

The reaction in the markets saw U.K government bonds fall whilst sterling appreciated against the euro and the dollar. EURGBP dropped under the 0.79 level while GBPUSD traded higher to sit above 1.97.The dollar strengthened against the Euro and currently trades around the 1.55 level.

London equities initially reacted positively to the retail sales figures however the FTSE still ended the day down 0.84%, reaching its lowest level since March. Despite a report showing a 5,000 fall in the number of individuals filing new claims for unemployment benefits, stocks initially slipped for a third consecutive day on Wall Street.

Investors focused on worse than expected manufacturing data as the Philadelphia Fed general economic index dropped to -17.1 representing a clear decline. However persistent anxieties over financial stocks were overtaken as a drop in oil prices pushed the Dow Jones 0.28% higher on the day.

In Europe political leaders attended an EU summit on Thursday aiming at tackling the crisis caused by the Irish electorate's rejection of the Lisbon Treaty.

Speaking before the summit, the German Chancellor Angela Merkel argued that although extra-concessions should not be made to Ireland, the Irish government should be given time to consider its next move. Merkel stated clearly that, "€œA two-speed Europe is not the way forward."

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK consumer confidence at lowest level since the end of Thatcher

U.K. consumer confidence dropped to the lowest level since Margaret Thatcher was ousted from office in 1990, as people became more pessimistic that the economy will slip into a recession, researchers GfK NOP Ltd have announced.

A gauge of sentiment declined 5 points from April to minus 29, the lowest since November 1990, the same month as Thatcher quit as prime minister.

Federal Reserve Bank of Dallas President Richard Fisher has said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices.

Other Fed Bank Presidents, Gary Stern and Thomas Hoenig, have expressed growing concern this month about rising prices. Fisher, is the only member of the Federal Committee to dissent three times from the decisions to lower overnight bank-lending rate, favouring either no change or a less aggressive reduction.

With that the dollar is heading for a second monthly advance against the euro and the yen as rising stocks and "declining" crude oil prices brightened the outlook for the U.S. economy, the worlds biggest oil importer.

The Euro fell following retail sales in Germany unexpectedly dropped for a second month in April. This lead to speculation the German economy (Europe's largest economy) is losing momentum as faster inflation erodes consumers' spending power.

There seems to be increasing expectation that the Bank of England will add to interest rate cuts this year with growing concerns the UK economy is continuing to weaken.

On the currency front this has led to speculation that the U.K. currency will decline to 81 pence per euro in the coming months, the pound traded at 80.98 pence on April 16th, the lowest level since the euro's inception in 1999.

The Australian and New Zealand dollars fell this week on signs growth is slowing as prices of commodities the two nations export declined.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Rally for Sterling

Yesterday saw the US Dollar and British Pound rally back against the Euro.

Figures showed a surprise drop in German retail sales, falling by 1.6% in February, market expectation was for a 0.5% rise, making this the lowest drop in a year.

This led many traders to cash in on their positions which have seen the Euro hit historic highs against both the USD and GBP. Whether this represents a long term pattern is debatable, particularly with this month likely to see both the Fed Funds rate and the UK base rate cut.

The USD gains were supported by better that expected US manufacturing numbers from the Institute for Supply Management. This data should be taken with a pinch of salt as new reporting methods gloss over a sharp drop in the new orders component, which had the lowest drop since Oct 2001.

The markets main focus will be on Bernanke's testimony today at 14.30 BST. They will be looking for indications as to the likely size of the Fed Funds cut on the 30th April. Sentiment seems to point to 50bpts cut, however a bullish testimony from Bernanke may change this.

Across the globe we saw the Reserve Bank of Australia signal the end of their rate raising cycle by keeping interest rates on hold at a 12 year high of 7.25%. The AUD dropped 0.8% against the USD.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Will Bernanke Provide the Answers?

The Euro continued its rally at the end of last week, hitting all time highs against GB Pound and the US Dollar.

Data released last week, particularly German and French business confidence, proved to be better that expected. This view added support to the ECB's decision not to follow the US and the UK by cutting rates.

The inflationary pressures in the Eurozone remain the focus of the ECB. Expect the Euro to keep hold of those gains this week with today's inflation data expected to add credence to their policy.

As last week drew to a close the outlook for GBP became increasingly dovish, with the likelihood of an April rate cut gaining momentum. The BoE has further signalled its intention to ease liquidity pressures in the market, particularly with 3 Month LIBOR still over 6%.

Bernanke's Testimony to congress will be the crucial indicator for the week. The market expects some difficult questions for Bernanke to answer, namely is the US in a recession and what is being done about it?

The obvious tool at the Fed's disposal is cutting the Fed Funds rate. Sentiment favours a 50bpts cut on the 30th April at the next FOMC meeting. It has been mooted that measures to nationalise bad mortgage debt will be announced.

Although a radical step, it is aimed at shoring up already weak confidence in the economy and on Wall Street. Friday's Non-farm pay rolls is expected to provide further evidence of a US recession.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Currency converter sees strong US data

Earlier last week, the chance of a 25 vs. 50bp rate cut was close to fifty-fifty. Now, the odds for a half point cut are less than 25 percent because the payrolls figure was not bad enough to warrant a larger rate cut.

Managing expectations has become a big component of the Fed’s job these days whether they are willing to recognise it or not. If the market is pricing in a quarter point cut and the Fed under delivers by leaving rates unchanged, they risk triggering a sharp re-pricing of the yield curve.

If they over deliver by cutting interest rates 50bp, it could cause many people to wonder whether some bad news has yet to be discovered.

The Federal Reserve’s interest rate decision has the power to shift the trend in the market, but they will probably contain volatility by releasing a more cautious FOMC statement that points out the risks of both growth and inflation.

If the Fed fails to give the markets the clarity that it needs, producer prices, consumer prices and retail sales will. If inflation and spending remains strong, then the recession story gets shelved for the time being and the dollar could see a short term recovery.

The other releases that we are also expecting are pending home sales, the US trade balance, import prices and industrial production.

Is the European Central Bank just talk or will they actually follow through with an interest rate cut?

Unfortunately, this question will not be answered until the next ECB meeting on January 10th at the earliest. With each passing day however we have more reason to believe that the ECB could actually make good on their threats.

On Friday, German industrial production was stronger than expected while the OECD leading indicator for the Eurozone remained unchanged at 98.4. Even the Eurogroup which has previously called for the ECB to step in and stop the Euro from rising now says that the economy is proving resilient in the face of shocks.

In the week ahead, we do not have many important pieces of data other than the German ZEW survey, which has been losing its market moving potential because it has repeatedly called for a slowdown that has yet to unfold. This means that US data will probably dictate the movements in the EURUSD.

Meanwhile aside from the Federal Reserve, the Swiss National Bank also has an interest rate decision. They are widely expected to leave rates unchanged, but there is a risk for a surprise rate hike or at least hawkish commentary from the SNB.

GBP

The British Pound recovered for the second day in a row which says a lot because it comes on the heels of the first interest rate cut in two years.

The futures market is still pricing in 50 to 75bp of easing next year and if expectations are correct, then the pound should continue lower. However there are often retracements within a broad downtrend and we expect to see one at the beginning of this week.

Before Tuesday’s FOMC meeting, we are expecting producer prices and the trade balance. The UK trade deficit should improve because the export component of manufacturing PMI accelerated last month.

We already know that inflation is a problem because the latest monetary policy statement talked up the risks to short term inflation. However anything goes after the FOMC meeting because the US rate decision could shift the near term outlook for many currency pairs. On Wednesday we also have UK employment data which we expect to be pound bearish.

Prices at the London open
GBPUSD – 2.0321
GBPEUR – 1.38.73
EURUSD – 1.4649
GBPJPY – 226.64
GBPCHF – 2.2936
GBPAUD – 2.3133
GBPCAD – 2.0390
GBPZAR – 13.6596

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Stronger data helps currency converters

The dollar was steady after a key survey on US manufacturing activity came in slightly above forecasts, while the Pound rose to a 19-day high against the euro as strong UK data dented the chances of a Bank of England interest rate cut this week. The ISM manufacturing index dipped to 50.8 from 50.9 but analysts had expected a bigger drop to 50.4.

While new orders and production improved slightly, several of the components were weak in November. However, some in the market had feared a reading below 50, which would have indicated a contraction in activity.

There was limited reason for optimism in the report, particularly given a sharp fall in the employment component, which does not bode well for Friday's key US jobs report and may add weight to the chances that the Federal Reserve will cut interest rates again.

Deterioration in employment at this stage could solidify the case for further US rate cuts. Despite the recent short-covering exercise, further dollar weakness remains the overwhelming likelihood by the end of this week.

Meanwhile, the pound rose to a 19-day high against the euro, which dipped below the 0.71 mark after yesterday morning's stronger-than-expected UK manufacturing PMI survey dented the chances that the Bank of England will cut interest rates on Thursday.

The CIPS PMI index of manufacturing activity accelerated sharply to 54.4 in November from 52.8 in October, well above analysts' expectations for a slight moderation to 52.5. The MPC is scheduled to make its monthly interest rate decision on Thursday. Though the vote is expected to be tight, the majority in the market are forecasting they will leave rates on hold.

Interest rate decisions will provide the focus of the week, with a decision by the Bank of Canada scheduled for todayand from the European Central Bank on Thursday.

Meanwhile, investors will also be monitoring Wednesday's US ISM survey on the services sector as well as Friday's crucial non-farm payrolls report for November.
Prices at the London open
GBPUSD – 2.0630
GBPEUR – 1.4078
EURUSD – 1.4659
GBPJPY – 227.38
GBPCHF – 2.3280
GBPAUD – 2.3603
GBPCAD – 2.0720
GBPZAR – 14.0176

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Weak dollar under pressure from FED comments

The dollar sank across the board, hitting a new 26-year low against sterling, in the immediate aftermath of comments from US Federal Reserve Bank chairman Ben Bernanke.

The central bank chief said the Fed is ready to counter the inflation risks caused by high oil prices, suggesting US rate-setters will be reluctant to lower interest rates further despite some signs of slowing growth.

Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity. There is no Goldilocks scenario from Bernanke who sees risks from inflation and an economic slowdown, the worst of both worlds.

Currency markets have been expecting the Fed to cut interest rates again in December, following reductions in the Fed Funds rate totaling 0.75 percentage points since the summer.

The central bank has said these cuts, bringing the benchmark rate to 4.50 %, were a pre-emptive move to stave off an economic slowdown as the housing market continues to decelerate and financial markets slowly recover from their turbulent summer.

Despite Bernanke's hawkish undertones, however, the dollar fell as markets appeared to focus on the negative economic tone of the speech. The US currency fell across the board, sinking to 2.11 against the pound, a new low since 1981.

The Pound had already strengthened to new dollar highs yesterday, after the Bank of England held rates at 5.75 %, quashing a growing minority view that it could reduce borrowing costs following a weak run of data. Nonetheless, analysts are convinced the next move in interest rates will be down, and some are speculating on a cut as early as next month.

With the economy facing the headwinds of previous interest rate hikes, considerable sterling strength, tightening credit conditions and rising energy costs, we see no need for the repo rate to remain at the present restrictive level of 5.75 %.

Mortgage calculators expect the first 25 basis point ease by February at the latest, with the clear risk that the BoE could begin as early as next month if leading indicators continue to soften rapidly.

The European Central Bank also held rates, at 4.00 %, a decision fully expected by markets. Most analysts believe the central bank will keep rates unchanged for some time as it tries to balance increasing euro zone inflation pressures with slowing growth.
Prices at the London open
GBPUSD – 2.1093
GBPEUR – 1.4367
EURUSD – 1.4680
GBPJPY – 237.38
GBPCHF – 2.3757
GBPAUD – 2.2789
GBPCAD – 1.9610
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling hits $2.10 as dollar is dumped

Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign exchange reserves.

The Pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.

The greenback's renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China's National People's Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.

Mr Siwei told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly."

Besides sterling, the dollar was down against 14 of the world's 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.

Sterling's move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.

While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country's manufacturing industry under pressure.

The flight from the dollar is helping to fuel oil's assault on the $100-a-barrel mark and investors' appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed's loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FED interest rate cut to 4.5 pc hits Dollar and boosts Sterling

The US dollar skidded to a new low against the euro yesterday while the British Pound broke through $2.08 after the Federal Reserve lowered a key interest rate by a quarter percentage point to 4.5 %.

The Canadian currency bought more than $1.60 for the first time since 1957. The 13-nation euro soared to $1.4503, its fourth new high in as many trading days, while the British pound bought $2.0813, after having hit a high of $2.0822

The Fed's statement was intended to signal a continued openness to cutting rates, while indicating that inflationary pressures made doing so risky. Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns.

Currency traders are not buying into the relative hawkishness cropping up in this month's statement. While the outlook for the Fed is between further rate cuts and no rate cuts ... rates will remain unchanged if not go up for foreign banks, causing currency traders to drop the dollar.

The rate-cut announcement, while expected, drove the dollar down, even as new U.S. data showed the economy grew at a 3.9 % pace in the third quarter, the fastest pace in 1 1/2 years. A second report showed that construction spending rose 0.3 % in September, the best showing in four months.

The euro, the Canadian dollar and the Pound have been climbing steadily against the dollar, regularly touching new highs since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.

The euro has been helped by sentiment that the European Central Bank has yet to finish a gradual campaign of rate increases, while the pound has benefited from expectations that the Bank of England will leave rates untouched rather than follow the Fed in cutting the cost of borrowing.

The Canadian dollar, a commodity-backed currency, has benefited as oil prices soared and demand for Canada's exports increases.

In other trading, the dollar rose against the Japanese currency, climbing to 115.31 yen from 114.77 yen. However, the dollar slid against the Swiss franc to 1.1565 from 1.1600. Rates remain on hold at 0.5% in Japan.
Prices at the London open
GBPUSD – 2.0801
GBPEUR – 1.4373
EURUSD – 1.4468
GBPJPY – 240.22
GBPCHF – 2.4102
GBPAUD – 2.2286
GBPCAD – 1.9658
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Dollar bounce on profit taking

The dollar continued to gain lost ground on the euro as falls in equity markets prompted investors to act decidedly to cut down on risky positions.

The dollar benefited from safe haven type flows what with Wall Street opening lower, further denting sentiment after major European and Asian bourses all ended down amid concerns about the impact of the sub-prime crisis on the US and global economy.

While concerns about the US economy also weighs on the dollar, no part of the global economy is expected to escape unscathed, in turn leading to widespread risk aversion.

The current market sell-off is especially more dire than the turmoil of February and August because of escalating probabilities of a US recession.

The yen has also been supported by increased investor caution, as market players shy away from the risky carry trade where they sell the low-yielding Japanese currency to invest in higher-yielding ones elsewhere. This in turn has pushed high yielding currencies such as the pound and Australian dollar lower.

Equity market woe is helping to weigh on the high-yielding pound, the dollar and yen are perceived to be more as safe-haven currencies than the pound, so it can be vulnerable when stocks fall.

However while the rise in risk aversion has given the dollar a boost, analysts still expect the greenback to remain weak in the long-term, especially following the notable absence of any comment on the currency at this weekend's G7 meeting.

The communique from the G7 gathering in Washington made no mention of the weak dollar, or indeed the yen, opting instead to call again for a faster appreciation of the Chinese yuan.

The dollar's fortunes will now depend on whether the Federal Reserve continues to ease its monetary policy stance. Most of last week's US data came in on the soft side and analysts expect to see a similar outcome in the coming days.

Apart from safe haven flows, the dollar is unlikely to find support this week as the cyclical data should remain weak and the market is likely to revise the probability of a US recession upwards. While no major data is scheduled for today, existing and new home sales due out on Wednesday and Thursday respectively are expected to show the housing market continuing to falter.

Elsewhere, the Canadian dollar fell back from recent 31-year highs on another outbreak of risk aversion in global markets, and also in response to weekend commentary from Bank of Canada governor David Dodge expressing concern about the speed of the currency's appreciation.

US interest rates dip

The US dollar was mostly weaker against major currencies in early morning trade this morning, extending overnight losses after the minutes from the Federal Open Market Committee's meeting last month appeared to leave the door open to further interest rate cuts.

The Fed slashed interest rates by 50 basis points in September and another reduction will put further pressure on the US dollar as traders go looking elsewhere for higher-yielding currencies.

The Fed said that the US economy was likely to grow below its potential for a while and that inflation had moderated. This suggests that the Fed may need to cut interest rates further and the continued pricing of a 25 basis points cut by early 2008 weighed on the US dollar.

The euro traded as high as 1.4115 dollars overnight after European finance ministers indicated they were more concerned about pressuring China over the value of the yuan than in stemming the rise of the euro against the dollar.

China has been under increasing pressure from its major trading partners, including the US and European Union, to increase the value of the yuan because it gives Chinese exporters an unfair competitive advantage by making their products cheaper.

Meanwhile, the Australian dollar was higher across the board in overnight trading as weakness in the greenback, a growing appetite for risky assets and higher commodity prices supported the currency.

A strong housing finance report for August, to be released at 13.30 today, could see the Aussie punch through Monday's 23-year high of 90.33 US cents.

Finally, the British Retail Consortium said like-for-like sales, which exclude new stores and space, were up 3.0 % in the year to September. This was higher than the 1.4 % growth forecast and ahead of August's 1.8 %.

The BoE's next move is widely tipped to be a cut in interest rates, following five increases in the past year or so, but economists are divided on how soon to expect a move downwards.

Meanwhile, the euro was recovering slightly after losses on Tuesday. European monetary policymakers have been voicing concern about the euro's persistent strength, it is currently trading above 1.40 to the dollar, but a Eurogroup meeting on Tuesday night did not break new ground as the euro zone's finance ministers reiterated earlier concerns about "excessive volatility" in exchange rates.

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US data hits currency

The US dollar came under renewed pressure after a weaker than expected factory orders report, reversing gains against the euro and extending a slide against the pound.

The euro had been firmly on the back foot after European Central Bank president Jean-Claude Trichet expressed concern about euro zone growth, and the Pound had been gaining already after the Bank of England kept interest rates on hold, quashing growing speculation of a cut.

The dollar took centre stage again, however, falling against the euro and Pound after data showed US factory orders fell for the first time in three months in August, the latest in a string of weak data that is fuelling expectations for more cuts in US interest rates following the Federal Reserve's half-point cut to 4.75 % a fortnight ago.

The Commerce Department said August's total factory orders dropped 3.3 %, or 1.7 % including transportation equipment. Economists had predicted an overall 2.9 % decline with a 0.9 % decline excluding transportation.

Focus will now shift to today's non-farm payrolls data for September. The previous month's data showed jobs falling, but expectations for September are relatively good following a healthy employment subsection in Wednesday's ISM non-manufacturing survey.

Elsewhere, the euro's weakness, which persisted against the pound if not the dollar, came after ECB president Jean-Claude Trichet said he sees downside risks to growth in the euro area in the wake of the credit crunch.

Trichet, speaking after the central bank left interest rates on hold at 4.00 %, as expected, said there is "heightened uncertainty" surrounding growth and that risks are tilted to the downside. He also stressed that price risks in the medium term are on the upside and predicted inflation will remain "significantly" above the 2.0 % target through to early 2008, but financial markets chose to focus mostly on the statements on risks to growth, pushing the euro lower.

The euro hit new records against the dollar earlier this week but Trichet, as expected, did not address the subject directly. By staying on hold, (the ECB is) clearly running the risk to fall behind the (inflation) curve but it would be very unwise to ignore heightened downside risks to growth.

Meanwhile, the pound went from strength to strength, regaining the 2.04 usd level after the BoE chose to hold fire on any interest rate cuts for the time being. While almost all economists had forecast the Bank to keep rates at 5.75 %, money markets had priced in a reasonable chance of there being a cut, so the decision gave sterling a boost.

The real reaction will be delayed until the minutes to the Monetary Policy Committee meeting are released in two weeks time. If at that point there is evidence of dissenting calls for a cut, the market will quickly look for action at the November meeting to coincide with the release of the next Quarterly BoE Inflation Report.

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Deposit Insurance for lenders?

The news making headlines overnight is the report in the Independent newspaper that the Financial Services Compensation Scheme has a war chest of £4.4bn for its deposit protection plan.

The GB Pound was heavily sold on almost all crosses on this revelation as the FSCS apparently had a fund worth £9bn which has reduced through payouts to depositors of collapsed credit unions. This is interesting news given that the government is considering depositor protection of up to £100’000.

German business confidence in September dropped to a 19 month low this morning as the strength of the Euro has caused caution on the part of companies in light of the current financing conditions.

The Euro saw highs in excess of 1.4100 yesterday and this is concerning given the state of the US economy and the reduced prospects for export growth.

The Bank of Japan August meeting minutes where released and provided comment on the nature of the decision not to raise rates. It showed that the swings in global financial markets were of concern.

They stated that they would adjust rates when the markets stabilise. As a result the JPY has strengthened against the US dollar.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England U Turn

In what amounted to a dramatic change in policy, the BoE yesterday announced that it was to auction in excess of £10bn three month money. This immediately brought deposit rates down and helped the FTSE rally up 2.8%.

The BoE had previously stood out amongst central banks by refusing to intervene and inject funds into the market to ease the liquidity problems. However, some are already saying that this is too little too late with the damage already done…

The pressure was mounting on the BoE to act after the Fed cut rates on Tuesday by 50bpts and inter-bank rates still remained inflated. These actions came on the day that the August MPC meeting minutes were announced which showed that a unanimous vote kept rates on hold last month.

Many now are forming the opinion that a rate cut next month may be on the cards, and at the very leas