Foreign Currency Report 28 July 2008

US Dollar

The US Dollar exchange rate rallied across the board last week as the US authorities attempted to soothe fears over the health of the US financial state.

Hank Paulson, US Treasury Secretary, reiterated on Tuesday that a strong Dollar currency exchange rate was very important to US interests, and reassured investors that the US government was forging ahead with plans to resolve the mortgage crisis, The comments helped to support financial stocks and lift the Dollar. However, a wobble in US bank shares later in the week took some of the shine off the Dollars advance.

It appeared the long-awaited commodity price correction had finally arrived, which, if sustained, could have widespread implications for currencies, especially among the leading economies. A drop in commodity prices could also see a rapid easing of inflation concerns. For foreign currency exchange markets, the decline in inflation pressures could have its most marked impact on the Euro against the Dollar.

So far this year the Dollar has suffered as the Federal Reserve, which targets both growth and inflation, responded to the credit crisis by slashing interest rates to stave off a financial collapse. Conversely, the Euro advanced as the European Central Bank, which only targets inflation, responded to the surging commodity prices with tight monetary policy and, eventually, raised rates this month.

Now, with pressure on financial markets easing and oil prices falling, the path of inflation should become less menacing for central banks, like the ECB, who have well publicized inflation targets. If you need any evidence of how the Dollar has done, the Euro currency strength has moved by nearly 5 cents.

Euro

Last week saw Sterling advance against the Euro, after the minutes of the Bank of England's monetary policy committee meeting revealed a surprising three-way split on the best path for UK interest rates. The minutes from the central bank's July meeting showed Timothy Besley voted for a 25 basis point rise to 5.25 per cent to combat inflation, while David Blanchflower voted for a cut, and the rest of the nine-strong committee voted to keep rates on hold at 5 per cent. Not only was the vote for a rate rise a surprise, but the tone of the minutes was also more hawkish than the market expected, hence the unexpected drive with Euros to the Pound. This raised the probability that the Bank would tighten UK monetary policy at its August meeting and pushed sterling higher across the board. But with 7 votes to hold it is very likely UK rates will remain as they are next month, given the fact that forthcoming UK economic data - including retail sales figures - were likely to support recent evidence that UK economic momentum was slowing.

So what have we got in store this week I think the only sensible answer is volatility, and that is not a good thing if you need to move a lot of funds. Who knows excactly what sort of gains and losses there will be from either further Dollar currency strength, a Euro rebound and progressive Sterling weakness. At Foreign Currency Exchange we can not control the market but we can use all the information we gain to your advantage. It is always a difficult decision when there is uncertainty, so speak to a broker and they will guide you as much as possible, and potential losses should be avoided.

To discuss your currency purchase and to find out how we utilise our forex market tools to save you as much as possible, call +44 (0) 20 7989 0000 and ask for John Flynn or alternatively email me on jtf@fcexchange.co.uk