Foreign Currency Exchange Report 01 September 2010

01 September 2010

 

Sterling

 

The Sterling exchange rate fell against the US Dollar and Euro yesterday as mounting concerns about the global economic outlook prompted investors to withdraw their assets from perceived higher-risk currencies.

 

Sterling briefly took back some of the losses seen versus the Dollar after figures showed a gain in mortgage approvals and consumer credit but couldn't sustain any momentum. "The numbers were slightly better than expected, but there is not much conviction in any Sterling rallies at the moment," said Adam Cole, global head of currency strategy at RBC Capital Markets.

 

Although some recent data has suggested that the UK economy has performed well, with figures on Friday showing an upward revision to already solid second-quarter gross domestic product growth, market participants are still wary. The economy is still vulnerable as public spending is slashed and the UK housing market still continues to post poor numbers. In fact Bank of England data showed mortgage approvals numbered 48,722 in July, just above an upwardly revised 48,562 in June. However, they were still well below November's 21-month peak of 59,117. "Although the Bank of England somewhat surprisingly reported that mortgage approvals edged up in July, the fact remains that they were still at a very low level and point to ongoing muted housing market activity," said Howard Archer, Chief European & UK Economist at IHS Global Insight.

 

The Housing market is often a good indicator to how well a currency will perform going forward so don't be surprised to see the Sterling exchange rate lose its momentum in these markets in the coming weeks.

 

US Dollar

 

The ongoing theme for the US Dollar in recent months has been the talk of risk aversion. The ongoing rotation from the Dollar into the other safe-havens has continued as uncertainty on the economic outlook persists following several data releases and the latest FOMC minutes. Markets were recently buoyed after the Conference Board, a business research firm, reported yesterday that its consumer confidence index rose unexpectedly in August to 53.5, beating most economists' forecast of 50.0. The mood, however, turned sour after minutes from the latest meeting of the Federal Reserve's top committee gave an underlying concern that the pace of the US economic recovery was slower than hoped.

 

"General risk aversion remains in place, and that is why the Yen and Swiss Franc remain steadily bought, as for the past three weeks," said Bank of New York Mellon analyst Samarjit Shankar.

 

The Yen, which hit a 15-year high against the US Dollar last week, continued to rise despite the Bank of Japan's decision on Monday to expand a multi-billion-dollar loan scheme to boost liquidity, amid hopes it would take the heat out of the Japanese currency. The combination of demand for Yen due to reinvestment flows and the lack of appetite for US Dollars because of the weakening, economic outlook pushed the Dollar-Yen to a 15-year-low last week which highlights the change in the way investors are viewing the markets these days.

 

Euro

 

The Euro exchange rate is a little higher against the Dollar after a cautious Federal Reserve report and the survey showing only a modest uptick in US consumer confidence underlined fears about a slowdown in American growth. Germany unemployment also fell by 17,000 in August, the Federal Labour Office said which helped strengthen the single currency. The rate of unemployment rate therefore held steady at 7.6%.

 

Inflation throughout the 16-nation Euro-zone also retreated to 1.6 percent in August, having hit a near two-year high point in the summer, European Union data showed yesterday. The 12-month rate slipped from 1.7 percent in July, although it has risen almost continuously from 0.5 percent last November during the bloc's emergence from the world's worst recession since the 1930s. Inflation in the single currency area in July was the highest since November 2008, when it stood at 2.1 percent, just above the European Central Bank's core economic target of 2.0 percent.

 

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