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

Wednesday September 19th 2007

By Michael Vaughan - Senior Executive Dealer

Sterling remained steady against most major currencies halting the recent heavy losses that have been seen. During the past weeks trading alone sterling has lost nearly 2% against the USD, 1.3% against the Cyprus Pound and 2% against the euro. Other currencies to have strengthened against sterling include the AUD at over 1.75% the NZD at nearly 2% and CAD at nearly 4%.

Why?

Sterling matched the previous day's one-year low against a basket of currencies on Tuesday as lingering concerns on the state of the UK banking sector led investors to shy away from relatively risky carry trades. The pound - which has the highest interest rates in the Group of Seven industrialised nations - has benefited from the carry trade where investors sell low yielding currencies like the yen to fund purchases of higher return assets. However the rush by Northern Rock customers to withdraw their savings from one of the UK’s largest mortgage lenders has fed into heightened risk aversion and a sharp sell-off in the pound over the last week.

Sterling did recover slightly throughout the day after finance minister Alistair Darling announced late on Monday that the British Government guaranteed deposits at Northern Rock. The Bank of England also announced that it would inject £4.4bn into financial markets, offering cheap credit through a so-called emergency tender at a rate of 5.75%, in an effort to shore up crumbling confidence in the UK banking system.

The banking sector is not out of the woods quite yet," said Daragh Maher, currency strategist at Calyon. "There seems to be some underlying support for the pound but the pound can't fight against the stream of bad news."

Following the Northern Rock situation the Financial Services Compensation Scheme, which covers banks, has come under fire. It protects 100% of the first £2,000 in any bank account and 90% of the next £33,000 - giving a maximum payout of £31,700 if a bank did go bust. FSA chief executive Hector Sants said that he would be looking to improve the savers' guarantee scheme, which he said "has limitations", particularly with regard to larger deposits.

Current conditions have paved the way for uncertain times in the currency markets. Should you wish to eliminate these risks contact your account manager to discuss the best options for you.

Other News

The Consumer Prices Index (CPI) fell to 1.8% in August - its lowest level in more than a year - from 1.9% in July. The rate is below the government's 2% target, and the fall is likely to add to expectations that UK interest rates have peaked. However, the RPI inflation measure - which includes mortgage interest repayments - rose to 4.1% from 3.8%.

Across the pond the interest rate-setters in the US have decided to cut rates for the first time since mid-2006, from 5.25% to 4.75%, more than had been expected. Analysts had expected the Federal Reserve to cut rates to prevent a housing market downturn and the “credit crunch" from denting the economy. This reduction in interest rates is an attempt to boost the economy by making money cheaper to borrow – in theory people will save less, spend more, and hopefully revitalise the US economy.