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

Wednesday August 22nd 2007

By Tom Higham - Team Leader

Tuesday's Trading

Sterling lost ground against a basket of major currencies yesterday as cautious investors continued to unwind their carry trades. As some of our regular readers will be aware a carry trade is where low yielding currencies such as the Yen are sold for higher yielding currencies such as Sterling and the Kiwi and Aussie dollars. While there was little economic data out yesterday the unwinding of these carry trades had a more pronounced effect on the currency market. By close of business Sterling was down over half a cent against the Euro and Cyprus pound and by three quarters of a cent against the US dollar.

In Europe

The euro zone's trade surplus (which measures an economy’s exports compared with its imports) with the rest of the world rose sharply in June, beating economist’s expectations, and suggesting that the region's robust economic growth is continuing. European statistics agency, Eurostat stated the 13 countries that share the euro had a surplus of €7.8 billion in their trade in goods with the rest of the world in June, far greater than the €1.7 billion surplus registered in May and more than the June 2006 surplus of €1.6 billion.

The figures were much stronger than the €3.0 billion surplus that economists had predicted in a Dow Jones Newswires survey and may indicate that the region's period of economic growth is set to continue.

This continued to boost expectations that there will be an interest rate hike in the Euro zone in the short term with the majority of analyst’s opinions stating it will be September. This led to the Euro gaining strength across the board.

If these expectations are to be realised then we could see the Euro continue to gain ground against Sterling, especially now further UK interest rate hikes are rumoured to now be a thing of the past. If you, like us, are concerned the market could be on the verge of a major drop then it may be worth speaking to one of the dedicated account managers here who will be more than happy to explain how to secure your rate of exchange in advance on a forward contract. These contracts have and will continue to save many of our clients thousands of pounds in the volatile currency markets.

Across the pond...

A statement from one of the key US senators yesterday said that the Federal Reserve had pledged to do all it can to ease the credit squeeze fears. Senate Banking Committee Chairman Christopher Dodd was speaking after he met with Fed boss Ben Bernanke and Treasury Secretary Henry Paulson. This led to a rise in US shares however many analysts believe the volatility is set to continue.

Adam Neal, from CMC Markets, said speculation was building that the Federal Reserve would cut its main interest rate, adding: "This would likely provide stocks with some further momentum, but until we see the actual relevant announcement this thinking will do little to eliminate any volatility." On Friday the Fed reduced the rate it applies to loans made between banks to 5.75% from 6.25%. Officially, the Federal Reserve is not scheduled to meet until 18 September. Some analysts argue that until then market jitters will remain.

Jitters in the currency markets can make a massive difference on your bottom line so it is important to ensure your trading facility with FCD is open so you are ready to trade and therefore able to make the most of any opportunity. To discuss how to go about opening an account do not hesitate to contact one of our dedicated account managers on 0800 328 5884.