Currency Update

Currency Update

After a few years of the US authorities talking about a strong Dollar policy it seems that now, at last, they may actually mean it. The previous years have been characterised by a policy of 'benign neglect' as a weaker Dollar helped the competitiveness of US exports, however it seems now that the Fed are more concerned about rising global inflation pressures and the price of imports. The switch in emphasis can be seen in a number of different comments from US officials, Treasury Secretary Hank Paulson said he would never rule out currency intervention to prop up the Dollar, George Bush said he was committed to keeping the US currency strong, perhaps more importantly Fed official's talk has started to focus on inflation. Fed member Fisher stated that he never supported rates being cut below 3.5% (they are currently 2%), and The Chairman Bernanke has started to turn up the rhetoric on inflation, saying the Fed will strongly resist inflation pressures, and also that the chances of a drastic downturn in the US economy has receded.

All the hawkish talk has raised the prospects of US rate hikes, with the chances of a quarter point increase raised to 60% in August, and over 90% in September. If the US authorities actually do start to back their talk with action it could be good news for all of us. The relation between the strength of the Dollar and the price of oil does show a strong inverse correlation, and if the Dollar starts to rise oil may come down, which will ease the inflationary pressures around the globe. The rise in the Dollar yesterday did bring down the price of oil from a high of $137pb to $132, with Gold also following suit.

The strong Dollar talk brought the Euro down to below 1.55 against the Dollar, while the Pound stayed steady after the fall overnight Monday to stay around 1.9550. The Pound has stayed steady against the Euro around 1.26, as in spite of  some slightly better than expected news from Industrial production figures in the UK economy, further hawkish noise from the ECB has kept the Euro supported.

We've just had the UK Labour market data which shows a fourth consecutive rise in the unemployment rate taking it to 5.3%, with a rise of eight thousand jobless claims. We've also had the trade balance figures showing a slight widening of the deficit. although both sets of data are negative for the UK, neither has hurt Sterling significantly.

The only other data released today is the Fed's Beige book and a couple of Fed members giving speeches in the US; they are likely to keep to the party line and talk up inflation and the Dollar.

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