Currency market updates - from Foreign Currency Direct (www.currencies.co.uk)

Wednesday October 10th 2007

By Robin Haynes - Director

Pound drifts after pre-budget speech – for some friendly guidance call 0800 328 5884

The Pound fell slightly against a basket of currencies yesterday as Chancellor Alistair Darling delivered his pre-budget speech to Parliament.

GBP yesterday:
Against USD: +0.05%
Against EUR: - 0.35%
Against CYP: - 0.35%
Against NZD: - 0.19%
Against AUD: - 0.64%
Against ZAR: - 0.05%
Against THB: -0.45%
Against CAD: - 0.26%
Against DKK: -0.35%

What did the Chancellor say that might affect exchange rates?

The headlines may have been about changes to the tax system, but for those of you buying abroad the bad news was that the Chancellor has warned that there will be more economic pain as a result of the recent world financial crisis.

He says that UK economic growth will slow from 3% this year to 2%-2.5% next year, a reduction from the previous forecast of 2.5%-3% made in March.

Almost inevitably, lower than expected growth could lead to less exports and lower interest rates (which would be needed to reignite growth) – and lower interest rates normally mean a lower Pound.

Although the currency markets did not drop sharply, sterling clearly slipped yesterday afternoon, and if “there is clearly a risk that a downward spiral could develop," as KPMG’s chief economist Andrew Smith states, then we could be in for troubled times ahead for the Pound.

GDP in the UK

What else is keeping the Pound up then?

Perhaps the impact of Darling’s speech was lessened by the UK’s trade gap falling in August, according to figures out yesterday.

Analysts were encouraged by the news, which is “Pound-positive” as it means relatively more exports and more demand for Sterling – keeping the Pound strong.

What’s happening in the USA for Dollar buyers?

Minutes from the Federal Reserve’s latest meeting were released yesterday evening and showed a unanimous vote for last month’s 0.5% interest rate cut, fuelled by crisis in the sub-prime credit sector.

The minutes showed policy makers were particularly concerned about the "exceptionally weak" housing sector infecting the whole economy.

The members also reduced their forecasts for economic growth in the last three months of 2007 and for 2008.

This, perhaps, explains why the Greenback was one of the only currencies to become cheaper against the Pound yesterday, although the exchange rate seems reluctant to get much better.

The dollar is still some way off its cheapest in the last 12 months, but a pertinent question might be in the current crisis-hit markets, if the cost of a dollar isn’t coming down any further now, is it likely to happen in the future?

And in Europe?

Not much to report in the Eurozone – although tomorrow morning’s monthly ECB report and GDP figures could move the single currency’s value.

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