In this week’s update: Moneycorp US Dollar update 14 September 2009
BANK DECISION RELIEVES INVESTORS
No changes from the Monetary Policy Committee. Stronger than expected manufacturing performance from Britain. UN committee recommends replacing the dollar with a “global currency”.
Although it looked a little precarious on Monday the pound did well for the rest of the week. Most of Tuesday and Wednesday was spent between $1.65 and $1.66 and a late push on Friday took it briefly above $1.67. As the dollar strengthened in the Far East this morning sterling fell back to open in London at $1.6550.
Sterling began the week with investors wary of what the Monetary Policy Committee might do. They there was good reason to be nervous after a series of bouncers from the Bank of England over the last couple of months and on Monday they did not want to touch sterling even with a long stick. That attitude changed on Tuesday with some stronger data from Britain’s manufacturers. Manufacturing production rose by +0.9% on the month, three times as much as analysts had forecast. The broader industrial production figure was also slightly ahead of expectations at +0.4. An added sweetener for sterling was an estimate by the National Institute for Economic and Social Research that the British economy expanded by +0.2% in the three months to August. The newspapers were quick to celebrate the end of the recession.
The nerves were back on Thursday ahead of the MPC meeting. Sterling fluctuated quite aggressively in advance of the lunchtime announcement so the announcement was something of an anticlimax. In less than 90 words the Bank announced its decision to take no new initiative. No new money for the Asset Purchase Facility, no change to the Bank Rate, no punitive charge on excess commercial bank reserves, no plan to join the euro, no three-pound note, nothing. The market’s relief was palpable and sterling lurched higher.
New York’s four-day week delivered little in the way of useful data. New and existing jobless claims were both improvements over the previous week and so were unhelpful to the dollar, which only thrives on bad news nowadays. Even that is not enough if it is the wrong sort of bad news. China and Russia have been moaning for long enough that the dollar ought not to be the world’s only reserve currency. That argument received a boost from a United Nations report calling for a global currency to replace it. The UN Conference on Trade and Development would like to see a global scheme along the lines of the post-war Bretton Woods agreement. It has in mind a system of managed exchange rates kept in line by central bank intervention according to relative economic performance.
That snippet did the dollar no favours and nor did a couple of speeches by US officials later in the week. An emerging sentiment on both sides of the Atlantic seems to be one of concern for ballooning government deficits as a result of giga-buck and tera-buck bailouts. The president of the Atlanta Fed said the current trend was unsustainable and would soon have to be addressed. US Treasury Secretary Geithner told the a congressional committee that the time was coming to wind down some of the “excess” programmes. Over here a study by the European Commission worried that the ratio of debt to GDP in Britain will hit 180% within a decade in the absence of action by future governments. They are already talking about the dollar taking over the yen’s old slot as cheapest-to-borrow in the “carry trade” because its rates are low and the currency is fading. It is not impossible to imagine that the pound could go the same way.
Sterling proved last week that it can go up as well as down but it has yet to show that it can stay up. The bounce from $1.61 two weeks ago appears to have run its course and the pressure is back on. A stop order somewhere south of $1.60 should be a serious consideration and buyers of the dollar should hedge up to 75% of their exposure. If the time horizon is close it would not be silly to cover 100%, just in case.
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