Currency Update

Currency Update

The Dollar's rally last week faltered slightly on Friday as US inflation came in as expected (ex food and energy) at 2.3%, whereas the Michigan consumer sentiment survey was softer than forecast. Now that they consider the credit crunch tamed by their drastic rate cuts, the US officials have been focusing on the risks of inflation, and although Friday's moderate figure may ease some of the immediate fears it will not end them, espiecally as CPI including energy and food has gone up to 4.2%. High food and energy prices were what the weekend's G8 meeting focused upon, and identified as the biggest risk to the global economy superseding the credit crunch. The Dollar had risen throughout last week partly on the expectation of the G8 meeting talking about the weak Dollar, but a leaked statement on Friday from the meeting, and the final communique on Sunday, didn't mention the Dollar, although there was a series of comments from participants in the meeting with Hank Paulson again saying that a strong Dollar is in the US nation's interest, and our own representative, Alistair Darling, welcoming Hank's focus on the Dollar particularly in context of the fight against inflation.

The leaked statement from the G8 coupled with inflation, and a weak survey did limit the Dollar's rise, but only slightly, pushing the EUR/USD rate up from 1.53 to around 1.54, and pushing the GBP/USD rate up to 1.95 from around 1.9450. This still represents a good week for the Dollar, the best against a basket of currencies since 2005. It wasn't such a good week for the Euro, as internal divisions have softened the currency. Ireland returned a no vote to the Lisbon treaty, seriously hampering the seemingly inexorable march of the political process, and just like in the European championships the European countries are having mixed experiences, Germany may be stumbling in the football but economically they still predominate and it is the smaller economies which are struggling with the global slowdown. The internal differences and divisions are likely to weigh in the Euro, and talk of it becoming the worlds premier currency could have been a bit premature.

It's a quiet day for the UK, but over in Europe we get the CPI figures (due out for the UK tomorrow). The Eurozone figure is likely to tick higher possibly up to 3.6%, which as usual will trigger a series of hawkish rhetoric from ECB members. Over in the US we have a couple of regional survey's, but of more interest will be a speech by a Fed member on the outlook for the US economy, particularly if he indicates rates may need to rise, which keep the momentum for the Dollar going into this week.

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