Foreign Currency Report – 27th September 2007

The U.S. dollar recovered from record lows against the Euro and pulled back from near a 15-year trough versus a basket of major currencies yesterday as buyers took advantage of cheap exchange rates.

An unexpectedly steep decline in new orders for U.S.-made durable goods last month failed to up-end the dollar's modest rebound even though it supported the case for the Federal Reserve to cut interest rates again in October.

Traders said further monetary easing at the central bank's October 30-31 policy meeting had already been priced in by the market, but expectations for the size of the cut would depend on upcoming economic data including the September jobs report.

The dollar has been on the back foot since poor housing and consumer confidence data on Tuesday. This string of disappointing data has pushed the dollar to record lows against the Euro and of course has added fuel to the speculation that the Federal Reserve will cut interest rates again, but we may see more profit taking in the short term, which may push the GBP/USD and EUR/USD exchange rates lower.

The British pound continued to weaken yesterday against both the Euro and US dollar despite slightly stronger UK economic data. Second quarter GDP was right in line with expectations on a quarterly basis, but the annualized figure was revised up from 3 to 3.1 percent. The current account deficit also narrowed from –£11.5 billion to –£9.1 billion.

There was some good news regarding the banking crisis in the UK. The Bank of England's auction of £10 billion at an interest rate of 6.75% was completely ignored by commercial banks. This could mean the recent problems within the money markets with banks reluctant to lend to each other may be subsiding.

Since the open this morning, the pound has advanced against the euro and dollar after a an industry report showed U.K. house prices rose at the fastest pace in three months in September.

The cost of a home gained 0.7 percent, up from a 0.6 percent gain in August, to an average 184,723 pounds ($372,309), Nationwide Building Society, the UK's fourth-largest mortgage lender, said today. Sales of new homes in the US, also released this morning, dropped to the lowest level in more than seven years in August, foreshadowing more cutbacks in construction adding to the USD weakness this morning.

Although these figures are positive for the UK housing sector, there is still a chance that the credit crunch and Northern Rock's crisis could still hurt our economy. Yesterday saw Barratt Developments, Britain's largest house builder, reveal a slump in sales by 10% over the past 2 weeks. To add to this, Citigroup reduced their forecast for house growth in 2008 to ZERO.

Choppy trading in these extremely volatile currency markets looks likely to continue. All data released from the UK, the US and the Eurozone is now deemed as important and is watched very closely by traders and analysts who will no doubt take action on the slightest of data deviations.

To get a better understanding of the possible market movements and what information could affect your currency purchase, or to find out how you can remove the risk of market


fluctuations please feel free to give me a call on 0207 989 0000 or drop me an e-mail to



djw@fcexchange.co.uk