Foreign Currency Report 13 April 2007

Sterling

Sterling has hit a 2-1/2 month high against the dollar today as data released has shown higher wage settlements added to investor expectations that the Bank of England will raise interest rates in May.
British pay settlements rose to 3.5 percent in the three months to the end of March, up from 3.42 percent in the three months to February, according to pay consultants Income Data Services. Analysts say this will put further pressure on the Bank of England to raise interest rates in May from 5.25 percent. The creep up in wage awards follows on from other firm UK data. We think there is scope for further sterling strength as the market increasingly prices in a May rate hike," said Steve Barrow, currency strategist at Bear Stearns.
The pound has risen by over 1 percent against the dollar this week as strong data bolstered anticipation of an interest rate hike. A report on Thursday from the Royal Institution of Chartered Surveyors also showed that house price inflation unexpectedly picked up in March after four months of easing.
Recent positive retail sales figures have been offset by poor trade balance figures which leave Sterling looking for further direction. At 1145 GMT Bank of England Monetary Policy Committee member John Gieve will give a speech at the Coventry and Warwickshire Chamber of Commerce. This may give us a clearer indication as to what the future holds for Sterling in the coming months.

US Dollar

The Dollar slid to a two-year low against the euro on speculation economic reports today will show a widening U.S. trade deficit and weakening consumer confidence.
The U.S. dollar has fallen against 12 of the 16 most-active currencies this week as government and industry data suggested a slowdown in consumption and the labour market. ``U.S. data today will increase speculation about the risk of a hard landing in the U.S. economy,'' Neils From, a currency strategist at Dresdner Kleinwort, said in Frankfurt. ``That's negative for the dollar.''
'The decline in the dollar reflects a sense of mounting crisis over the U.S. trade imbalance issue,'' said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo. The U.S. deficit looks likely to have risen to $60 billion in February from $59.1 billion the previous month, according to a recent economic report.
Though the Fed kept rates at 5.25% in March, analysts are far from clear which direction the Fed will head next. Economists have had mixed reactions to the latest minutes, with some saying it remained hard to interpret the Fed's comments, partly due to the battle in the Fed between those more worried about inflation and those more concerned about growth.
The likelihood is that whilst the US Economy stabilises the Federal Reserve will be reluctant to increase or cut rates until the economic picture becomes clearer. This has left the dollar open to potential narrowing in interest rate differentials against the other major currencies. This current weakness is representing a perfect time for anybody looking to purchase dollars, buying today or securing a price for the future.

Euro

The Euro rallied to a more than two-year high against the dollar yesterday, after comments from the head of the European Central Bank boosted expectations interest rates in the euro zone will be raised at least once more this year.

The combination of robust Euro-zone growth and rising interest rates is fuelling the single currency. The Frankfurt-based ECB held rates yesterday at 3.75%, as expected, after a quarter-percentage-point hike in March. The ECB sets interest rate policy for the 13 countries that use the euro as their currency, from Germany to Slovenia. The central bank has gradually lifted rates from a low of 2% in December 2005 as the European economy has improved

At a post-meeting press conference, Jean-Claude Trichet said the bank will continue to monitor inflation risks "very closely," and that wage increases remain a significant risk to price stability.
The Euro briefly came under a bit of pressure as Trichet held back from using the phrase "strong vigilance," which would have likely indicated a further hike in May. Instead Trichet said monetary policy continues to be "on the accommodative side."
Analysts say the euro recovered because while Trichet's comments raised doubt for a hike next month, the European Central Bank is still on track to raise rates at least one more time this year.

Overall, Trichet's comments added nothing new, except for a confirmation of market expectations for a further hike and at least one more hike later in the year.
Using the term 'vigilance' is seen as merely a tactical, as it would have been received as a guarantee of a May rate hike, thus risking further elevating the euro from its current two-year highs. Today's change of rhetorical tack does not preclude a rate hike; it only means the ECB is being cautious with the rising value of its currency.

Although there is a little uncertainty when the ECB will increase rates, it is almost guaranteed that they will in the near future. This increase will cause the Euro to strengthen and become more expensive to buy, therefore if you are looking to purchase Euros in the near future then it will be prudent to do so before these hikes materialise.