Foreign Currency Report 03 September 2008

GBP

Sterling continued its poor run yesterday as the government's plan to revive the UK's ailing housing market was met with derision by traders. The Pound saw fresh record lows against the Euro and tumbled to its weakest level since April 2006 against the Dollar.

The UK Treasury announced the zero rate tax band on stamp duty had been increased from £125,000 to £175,000 for the next 12 months. However, the relief is unlikely to be enough to encourage much interest in the UK housing market which has in recent months suffered its worst collapse since the early 1990s.

There is growing a lack of confidence in the UK economy and a feeling that government policy can do little to prevent a further slowdown. The relief plan has been seen as more of a gesture than anything else and will do little to halt the slide of the weakened Pound.

The outlook for Sterling is bleak. There is no positive data on the horizon and with a hold decision most likely at Thursday's MPC meeting clients looking to buy Euros or Dollars with Sterling should seriously consider protecting their purchases.

USD

Meanwhile the Dollar surged to a fresh six month high against the Euro and a 3 year high against the Pound as oil prices tumbled.

Falling oil prices not only eased concerns over US growth but increased the chances that central banks outside the US would cut interest rates to spur growth as the inflationary threat of elevated commodity prices receded.
The hefty fall in oil prices boosted the Dollar across the board, even in light of U.S. factory activity unexpectedly shrinking slightly in August according to an ISM data released yesterday.

The Institute for Supply Management said its index of national factory activity edged lower to 49.9 in August from July's 50.0, the level separating contraction from expansion. The report suggests the factory sector is still struggling, along with the rest of the economy, to overcome the effects of the worst U.S. housing slump since the Great Depression.

With the decline in crude oil providing momentum the Dollar will likely remain well supported in the days ahead. For those buying Dollars today's prices may represent good value in the short to medium term.

EUR

The Euro continued to advance on Sterling yesterday as, although traders accepted that the European Central Bank is going to hold interest rates at its policy meeting on Thursday, there is scope for rate hikes in the future.
The European Central Bank is widely expected to leave rates unchanged as they seek to balance inflationary pressure with downside growth risks. On net this shouldn't have a large impact on the Euro, but what could shake the currency up is commentary by ECB President Trichet.

At a press conference following the decision Trichet will explain the reasoning behind the outcome and analysts believe this will show signs of a mixed economic outlook with possible rate hikes on the horizon in order to control price pressure at the manufacturing level.

This leads to dual pressure for those clients buying Euros with Sterling, the UK economic outlook remaining bleak whilst the Eurozone continues to remain strong.

There is a lot going on in the currency markets at the moment but one thing is certain, Sterling is in trouble! Clients looking to buy overseas have seen their property prices spiral since the start of the year in both Europe and the US. With average priced property increasing in cost by over 15,000 Euros in this period and no signs of recovery for the Pound, speak to your dealer to understand how to protect your budget.