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

uesday September 18th 2007

By Stephen Hughes - Strategic Planner

Exchange rates continued to tumble yesterday as the fallout from the Northern Rock crisis continued to unfold.

Worried savers are continuing to flock to some Northern Rock bank branches to withdraw their savings, following similar scenes over the weekend.

Bank boss Adam Applegarth said people could withdraw money and that it was "business as usual", while new Chancellor Alistair Darling appealed for calm and guaranteed that savers' money would be safe.

About £2bn has been withdrawn since Thursday, when the bank applied to the Bank of England for emergency funds.

The problem was originally caused by Northern Rock deciding, for safety’s sake, to open up what's effectively an overdraft facility with the Bank of England. It did this because the US credit crunch means it's difficult for banks to borrow money from other financial institutions at the moment, so it wanted the facility just in case it was needed.

As yet it hasn't used the facility either, it's just there for emergencies. Though this did result in its share price dropping as, if it did need to use it, borrowing would be expensive because the Bank of England imposes a higher rate than normal. All in all, this wasn’t such a big deal for customers, more for the markets; yet it ended up on the front page of the newspapers and that's where the problems started.

The media coverage caused widespread panic. People started queuing outside branches or trying to withdraw money on the web. Add this to the fact that Northern Rock’s web site couldn’t deal with the demand to withdraw cash and you get a siege mentality. Rather than thinking, “there’s heavy demand so the web site is struggling”, worry sets in and people think “they’re deliberately stopping me getting my cash”. Add all this together and what wasn’t in reality a problem suddenly becomes a serious issue for the bank.

Northern Rock shares were 40% down at one point and ended 35.4% lower.

Shares in fellow mortgage banks also suffered, with Alliance & Leicester slumping in late trading to finish 31.3% lower. Bradford & Bingley shares were also down, losing 15.4%.