Foreign Currency Report 26 November 2008

Sterling

Yesterday in an announcement the Governor of the Bank of England Mervyn King announced that if the commercial banks operating within the UK do not start lending to each other, we will go into a 'steep recession'. Speaking to the Treasury Select Committee, he said "this was more important than anything else at present". He also mentioned the government may have to directly intervene to insure banks start to increase their lending, and that even nationalising more banks cannot be ruled out, but added that the current rescue package should start to work to avoid this.

So far the UK government has pledged to buy stakes in 3 main banks, RBS, Lloyds TSB and HBOS in an effort to shore up our economy. Commenting on inflation Mervyn King said that, in the medium term at least, it could fall below its 2% target, something of which for the past few months has been out of the question, which is obviously good news and that means the governments bailout plans to kick start the economy may actually be showing signs of working, as inflation figures showed a drop from 5.2% to 4.5% in October. Even though the organisation for economic cooperation and development (OECD) warns of a severe economic downturn in the UK next year, as inflation falls, regardless of the growth forecast, it just opens the door for more interest rate cuts going into the New Year and more bad news for all of you Sterling sellers as the currency exchange rate becomes ever weaker.

Euro

Today we have the consumer price index from Germany, which surprise surprise is likely to be bad news. The recent GDP reading for Germany showed that economic growth contracted 0.5% in the third quarter, confirming that Europe's largest economy is heading into a technical recession. The breakdown of the report showed that private consumption was revised higher to 0.3% from an initial reading of -0.6%. The data paints a bleak picture for Germany and the rest of the Euro zone and it now looks like they too will have to start thinking about cutting interest rates again - typically devaluing the Euro currency as a result. Mean while the GFK data released actually showed consumer confidence in Germany unexpectedly rose for a third consecutive month from 1.9 to 2.2 this month, thanks to falling energy costs. Cheaper oil prices outweighed growth concerns as consumers raised their outlook for the economy, but the positive data could be short lived as Europe's largest economy heads into its worst recession since 1996.

US Dollar

US Treasury secretary Henry Paulson in a conference yesterday stated that the Federal reserve is preparing to inject $800bn into the US economy in a further effort the stabilise their financial system, saying the stimulus package was aimed at making lending available to consumers. About $600bn will be used to buy up mortgage-backed securities while $200bn is being targeted at unfreezing the consumer credit market.

Financial institutions are reluctant to lend, deepening the economic slowdown. Key lending such as credit cards, car loans and student loans had essentially come to a halt in October, Mr Paulson said. He added that the new measures were aimed at getting these types of lending back to more normal levels. The announcement came as Commerce Department figures showed US economic output shrank between July and September at a faster pace than initially predicted, which the White House described as "troubling". Also GDP fell at an annual rate of 0.5% last quarter, more than the forecast 0.3% a month ago as general consumers have curbed spending more now than in nearly 30 years. As the market digested the data and comments from economists we saw the US Dollar exchange rate retract against nearly all major currencies - its biggest 1 day decline in nearly 2 weeks. Those still needing to purchase the Dollar would do well to get something tied up this week and take advantage of the unforeseen weakness before more depressing news arrives from the UK, and the so called 'Drunk reaching for the whisky bottle' we have as a prime minister. Kind words there from the London major Boris Johnson.

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