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

Wednesday September 12th 2007

By Tom Arnold - Senior Executive Dealer

Tuesday’s Trading

The Pound hit a one month high against the Dollar and gained against the Yen on Tuesday as investors moved back into riskier positions, encouraged by prospects of an interest rate cut from the Federal Reserve, next week.
Stocks gained in Europe and the US as investors become increasingly confident that the Federal Reserve will cut interest rates to counter problems in the credit market.

This has supported Sterling as it is a destination for carry trades, where investors borrow low yielding currencies like the Yen, to fund investments in higher yielding assets.

"The Pound has bounced back and stocks are up as sentiment has improved, driven by hopes of the Fed easing," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

Sterling’s gains against the Dollar and Yen were exceptions to the rule though, as weakness triggered by the collapse of British sub-prime specialist Victoria Mortgages, hit the Pound against most of the other majorly traded currencies, including the Euro and the Cyprus Pound.

The company said it had gone into administration on Monday, as the increased cost of borrowing made it unable to fund new loans. Industry experts say it is the first British lender to go into administration in the current credit crisis, and that the company's demise is prompting fears that Britain could be more exposed to the sub-prime mortgage problems than was thought.

Weak trade data also put the Pound under pressure. Britain's goods trade deficit with the rest of the world, widened more than expected in July, official figures released on Tuesday showed. The Office for National Statistics said the country’s goods trade gap widened to £7.065billion, higher than economists' forecast of a £6.4billion deficit. Total exports of goods in July rose by 2.5% to £19.2billion and total imports rose 4% to £26.3billion.