Is our romance with the US dollar on the rocks?

Currencies Direct September 4th 2008 - 2 minute read

The market's love affair with the US currency cooled somewhat yesterday afternoon (3 September) after starting the day in much the same vein as for previous sessions. We saw the pound fall to a low of 1.7664 before weak US data provoked a bit of a switch back out of dollars. The Federal Reserve Beige Book, released in the evening, and which reports the Fed's perspective on the state of the economy was fairly predictable in its conclusion….

This could be the description of most economies at present but with the underlying feeling being that the US economy is set fair for a rebirth, the flight to dollars and dollar-assets is likely to resume – probably not to the same degree as over the past six weeks but certainly continuing that way.

Sterling has maintained its weaker bias this morning on economic, political and social concerns but, and it's a BIG but, there does appear to be a silver lining developing. Since the start of the credit crunch, Sterling's value against the euro has fallen by 20% and on a trade weighted basis by 16%. These moves are of the same magnitude as when Sterling was ejected from the ERM all those years ago. For those of you old enough to remember, this sudden devaluation was immediately followed by a massive export boom as quality UK goods became "cheap"(er) in Europe. It is quite feasible that the combination of reduced consumer spending (on less disposable cash and more expensive foreign imports), cheaper money (on interest rate cuts to come) and weak Sterling (helping exports) could aid the UK economy.

Today, 4 September the focus will be on the interest rate decisions here, in the Eurozone and in Sweden. There is a chance that the Riksbank might surprise with a 25bp rate rise but it is widely accepted that there will be no move from either of the other two central banks. I can still see a move by the MPC at its October meeting however, especially if oil and commodities prices remain at their recent lower levels. The Bank of Canada left its rates on hold yesterday.

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