Foreign Currency Report –15th November 2007

Sterling

The Bank of England has warned of a number of risks to the UK economy next year, in comments that analysts have said point to lower interest rates. In its quarterly Inflation Report, the Bank forecast the economy would slow in 2008 and inflation would accelerate. However, it added that even if interest rates fell by half a percentage point, it would still hit inflation targets.

Analysts said that this signals that interest rates should dip next year from their current level of 5.75%. This helped the pound fall to a four year-low against the euro as investors bet that UK interest rates would be cut before their European counterparts. The pound also fell against the US dollar, though analysts pointed out that sterling had previously been trading at its highest levels against the greenback since the start of the 1980s.

The report marks the first formal assessment of the impact of the credit crunch that has gripped markets. As Investors typically look for markets with higher interest rates as they offer better rates of return, a decrease in interest rates means a weakening in the currency so anybody shocked by recent falls in the market may well be further surprised if and when an interest rate cut materialises.

Dollar

Bank of America Corp. cut its forecasts for the dollar on concern losses on securities tied to U.S. subprime mortgages and a slowing economy will reduce the allure of the nation's assets. The second-largest U.S. bank said signs of weakening growth may prompt traders to increase bets the Federal Reserve will lower interest rates again in December or in January. With concern over the U.S. financial sector unlikely to be cast aside any time soon, further dollar depreciation is likely.

The U.S. currency fell to a record low against the euro this month as traders bet the Fed will lower its target for overnight loans between banks by a quarter-percentage point to 4.25 percent to prevent the worst housing slump in 16 years from cooling the economy.

The dollar dropped 9.8 percent against the euro this year, the second-worst performer among the 16 most-actively traded currencies, as the interest-rate premium in the U.S. narrowed. It has also fallen 4.5 percent against the euro and 3 percent against the pound since the Fed reduced its benchmark interest rate twice to 4.5 percent, starting on Sept. 18.

The U.S. bank expects the dollar to bottom out against the euro, pound and the yen by year-end and start to strengthen due to an upturn in the U.S. economic outlook and dwindling expectations of lower rates.

Euro

The euro was broadly stronger versus other majors yesterday, soaring to its highest level versus Sterling since October 2003. The euro also moved closer to its all-time high versus the dollar as traders assessed reports on Euro zone growth and retail sales in the US.

The euro continued its uptrend as traders considered the release of data showing that Euro zone economic growth stood at 0.7% in the third quarter, up from 0.3% in the second quarter. The number came in better than the expected 0.6%. The annual growth was 2.6%, matching economists' expectations. This continued strength of the currency has many advantages for those in the Euro sector as it allows for low inflation and interest rates, exchange rate and market stability, cheaper imports, more trade and investment, easier and cheaper travelling, increased price transparency and more competition.

What this means for anyone purchasing any of the major currencies is that the Euro will have an ever increasing say on how your chosen currency performs. With the long term outlook now that of further Euro strength and Sterling and Dollar weakness, perhaps now is as good a time as any to make the most of what is left of the market.