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

Wednesday September 26th 2007

By Colm Gilhooly - Desk Manager

US Markets Still In Trouble

The Dollar hit another record low against the Euro and remained historically weak against Sterling after data showed US consumers are less confident in the economy then previously thought.  According to the US Conference Board, its consumer confidence index shrank from 105.6 to 99.8.  This drop was significantly below the forecast 104.5 and provides further evidence that the US Federal Reserve may have to cut rates again to avoid a sharp slow down in the US economy- a move that would likely weaken the Greenback.

This news was further compounded by reports that the US housing market is going from bad to worse.  The National Association of Realtors stated that existing house sales were down 12.8% from last year and the number of unsold houses is on the increase.  With data like this, an interest rate cut may be the shot in the arm the US housing market needs- according to Paul Ashworth at Capital Economics, “these reports point to the need for further Fed action…we see rates at 4.5% by year-end.”

UK Rates Also Under Review

Whilst talk of an interest rate cut in the US would normally help strengthen the pound against the dollar, part of the reason this isn’t happening currently is that many analysts are uncertain what is going to happen to interest rates in the UK.  Bank of England policymaker Andrew Sentence, usually seen as an interest rate hawk, said yesterday, “There is some nervousness coming in from the consumer side of the economy…also uncertainty is being generated by what’s going on in financial markets.”  This has hinted at possible interest rate cuts next year in the UK which seems to have been priced into the value of the pound.  As such Sterling has failed to make the same sort of headway against the Dollar during this turmoil as the Euro has and indeed, has actually lost 6 cents in less than three weeks against the Euro.

Eyes will very much be on the BoE’s money market auction today, the results of which will likely shed more light on how much stress the UK financial system is under.  This is on top of the news yesterday that the UK deposit protection scheme currently only holds £4.4 million in reserve- not much if one of the major lenders went under!  All this negative press has clearly devalued the pound, largely at the gain of the Euro.