Currency Update – Tuesday

Currency Update – Tuesday

The Dollar took a brief pause yesterday as some bad news from it's financial sector gave the markets food for thought. The two huge, and now explicitly, government backed housing companies, Freddie Mac and Fannie Mae, fell 20% in value as the US Treasury may have to recapitalise the lenders, there was also rumours that Lehman brothers would report a large 3rd quarter loss, which set a weak tone for financial stocks. The Dollar did fall on the news allowing the Euro to climb back above 1.4750, but normal service was soon resumed as the Dollar continued it's advance dragging the Euro back down around 1.4650 on this morning's trading.

The Pound failed to take advantage of the Dollar's pause as it faced it's own troubles, with Rightmove announcing a 4.8% drop in house prices, and the British Chamber of Commerce announcing that a UK recession was possible. The news didn't hurt the Pound against the Euro as it kept around 1.2650, but overnight Sterling has suffered at the hands of the Dollar's advance dragging the GBPUSD rate down to around 1.8550 this morning.

The Australians are already nervously looking at the Olympic medal table as the UK climb ahead in third place, and as the Aussie's mull over the prospect of losing their sporting superiority, their currency also lost some of it's strength as the RBS minutes from the last rate decision were released showing that the problem of interbank funding isn't just a UK issue. The minutes pointed out that financial conditions are 'effectively getting tighter as a result of ongoing pressure on lenders' cost of funds in the market.'. A move in rates downward now seems likely as the minutes declaring there is 'the risk of a deeper and more persistent slowing in the economy.'. The markets now expect 0.5% of rate easing before the end of the year, and the AUD has fallen as a result, dropping almost a cent against the Dollar, and over a cent against the Pound, which now sits around 2.1450.

There is no data out today for the UK, we have to wait for tomorrow's MPC minutes. In the Eurozone we do have the German ZEW index which will be looked for signs that the German economy is stalling, the figures are likely to remain static, albeit at a low level. There is also the US Producer price index, which is likely to follow last weeks CPI figures and show a high rate of price rises, with the annual rate expected to be around 9.3%, which could again give the Dollar some support.


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