Foreign Currency Report 14 August 06

UK Pound

Sterling edged towards a recent 8-month high versus the Euro and rose against a broadly firmer dollar on Friday, taking direction from moves in other major currencies in a session with no key British economic data.

Sterling came off last week's two-year high on a trade weighted basis after British police said they foiled a plot to blow up transatlantic flights. Analysts however say that underlying support remains for the pound, which rallied after a surprise Bank of England rate hike last week.

"It seems there is interest to buy euros and sterling," said Neil Parker, currency strategist at Royal Bank of Scotland. "We had an interest rate rise and the inflation report, and people are generally more willing to buy sterling because they see a further interest rate hike in the pipeline."

There is more positive news for Sterling on the back of news that the Government has downgraded the threat of a terrorist attack from the highest level imposed last week, with police foiling a plot to blow up airliners.

Home Secretary John Reid said the switch from "critical" to "severe" means an attack is not thought to be imminent, although the threat remains. "There is still a very serious threat of an attack," he said. "I want to stress, therefore, that the change in the threat level does not mean that the threat has gone away."

US Dollar

The dollar traded near its highest in almost three weeks versus the yen before U.S. inflation reports this week that may add to the case for the Federal Reserve to raise interest rates again this year. Core consumer prices rose in July from a year earlier at the fastest pace since November 2001, a report Aug. 16 will show, according to a survey. The Fed last week broke a two- year cycle of rate increases, saying further action depends on the outlook for inflation and growth.
If the market however keeps rebuilding its expectations for the Fed to raise rates that will only help the dollar to strengthen. The dollar also continued to strengthen with the news that British authorities arrested a number of people in connection to a terrorist plot. This caused national threat levels to spike in the US and the greenback experienced a marked flight to safety demonstrating once again that politics outweighs economics in the currency markets.

The renewed possibility of an interest rate hike and the continued use of the dollar as a safe haven currency could therefore suggest that taking advantage of current dollar weakness could be worthwhile.

EURO

The Euro approached a record against the yen on speculation a report today will show the fastest European growth in two years.
Stronger expansion in Europe is adding to demand for assets denominated in the Euro and fuelling inflation in France, Spain and Germany, the region's largest economy. The central bank for the 12-nation currency looks likely to lift benchmark interest rates twice more this year to curb rising prices, according to a survey.

A Bloomberg survey shows belief that the bank will lift its benchmark to 3.5 percent this year, based on a median of 24 analyst forecasts.
These impending interest rate decisions will continue to strengthen the currency so any body looking to purchase Euros now or into the future may be well to do so in the immediate future.