The USD – US Dollar Update

In this week’s update from Moneycorp:

SUPER STERLING

By the end of Friday the pound was nearly up to $1.46, nine cents up on Monday’s opening level. Only this morning did the pound fall back but it was still trading at $1.4750 when London opened.

The pound was an all round winner as the bears ran out of bad news. The possibility of a Rate cut will weigh on sterling at least until Thursday. US GDP shrank by 3.8% in Q4. Dollar interest rates remain on hold.

If only for one week, Sterling was the undisputed champion of the world. Over the seven days it gained 5% against the US dollar, 5.5% against the Swiss franc and 6% against the euro and the yen. Its performance against the antipodean dollars was even more striking, adding 8.5% against the Aussie and 9.5% against the Kiwi.

The two reasons for its success were a reaction to the trashing it had suffered earlier and a growing realisation that Britain’s is not the only economy in the firing line. UK economic data were few and far between, thus not providing too many opportunity targets for the bears. Of the figures that did come out some were even relatively benign for a change. The week got off to a good start for “risky” currencies with harmless data on all sides – not just the UK – setting a tone for greater risk appetite that would carry through most of the week.

For the rest of the week UK ecostats managed to dodge the bullets. The CBI’s retail survey was not as bad as feared. Nationwide’s house price index was in line with figures already seen elsewhere. Most of Friday’s money supply figures were positive, including a 15% increase in December’s mortgage approvals.

The dollar’s performance against sterling obscures its better results elsewhere. The greenback did not have a particularly bad week; the pound simply had a better one. The confirmation of erstwhile New York Fed chief Tim Geithner as Treasury Secretary set a positive tone on Monday that helped the dollar over some less than helpful statistics, including an 18% annual fall in the Case/Shiller metropolitan house price index. The House of Representatives’ approval of President Obama’s $800+ billion economic stimulus plan was another feather in the dollar’s cap.

As had been almost certain, the Federal Open Market Committee left its Funds rate unchanged in a 0-0.25% target range. There was little else it could usefully do. Only in the wording of its statement was there any change. For the first time the FOMC allowed a note of extremely guarded optimism to creep in, suggesting that “a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.” Rampant bullishness it was not, but it was enough to send the dollar a cent and a half higher against the euro.

News on Friday that the US economy had shrunk by – at first estimate – 3.8% during the fourth quarter of 2008 was a mixed blessing. It was not as bad as the -5.0% that the market had been expecting. On the other hand a 3.8% contraction was hardly the news to bring investors rushing in.

The last week of impressive gains will be a tough act for sterling to follow. A bounce in reaction to a long run of losses is not the same thing as a sustained rally. Moreover, the pound’s supporters will have to face their monthly test of nerve on Thursday with the Monetary Policy Committee’s decision on interest rates. The current guess is that a 50 basis point cut will take base rates down to 1%. Expectation of a cut this week already has investors looking ahead to the next moves. There is concern that sterling rates could follow Swiss, Japanese and US rates to I-can’t-believe-it’s-not-zero. This worry was laying heavily on the pound this morning and it could remain there at least until Thursday.

Last week’s high for sterling/dollar now represents a technical obstacle for the pound. With Thursday’s rate decision on the horizon it is hard to see what will help sterling to break higher. With most of the bad news already incorporated into the exchange rate the pound should not come under undue pressure but that does not mean it can replicate last week’s performance. Buyers of the dollar should hedge their exposure, buying forward around half the amount they will need.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t forget to mention INTERNATIONAL HORIZONS  for the best rates. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility.

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