No free lunch for Sterling
Throughout the week, currency exchange rates climbed amidst improved market confidence. The US dollar and yen declined as economic data showed the pace of recession easing in the UK, eurozone and US. Minutes from the FOMC and MPC meetings supported the view that there is now greater stability in the banking sector and international investors looked to diversify their funds rather than shadow appetite for risk.
In the UK, retail spending improved in April and inflation is running at its lowest level since 1948. The government considered selling Lloyds and RBS shares while the IMF praised the UK's decisive action in combating the economic crisis. Sterling climbed to a six-month high against the dollar, on track for its largest monthly gain since 1993, and reached a three-month high against the euro.
On Thursday however, Standard & Poor's announced that they are downgrading the UK soverign debt rating from "stable" to "negative". The FTSE tumbled and the pound shed three cents against the dollar in ten minutes. Sterling has since recovered those gains but the incident proves the importance of market volatility and information when it comes to currency transfer.
The US dollar has weakened on the back of improved international confidence. As stability is beginning to emerge and the pace of recession is easing, investors are looking to diversify and this is leading to a flow of funds away from the US dollar and yen. It is also responsible for the boost in euro, pound, Australian and Canadian exchange rates.
Minutes from the FOMC meeting added to dollar weakness, as signals that the Fed may expand its QE program threaten to undermine the dollar's status as a reserve. The fact that this failed to cause a surge in risk appetite suggests that the idea of stability seems to be gaining traction and signals that investors are looking beyond just risk appetite when considering where to keep their currency.
The euro has also gained ground as recession appears to be easing in the eurozone. Export levels were up by 1.6% in February and imports increased by 0.4%. While these represent a significant contraction from last year, they also show the pace of recession is easing and this boosted demand for the euro. PMIs for both manufacturing and services also revealed better than expected results for May and the euro climbed to 1.38 on the dollar.
In Eastern Europe, Hungary announced its commitment to slashing government debt and Moody's downgraded its view of the Czech banking sector to "negative". The Polish zloty has recovered ground on the euro as market confidence grows.
In India the election of Manmohan Singh's Congress Party caused such a jump in the rupee that it forced the Bombay Stock Exchange to close for a day. Election of the Congress Party is expected to provide a mandate for the economic reforms that have driven Indian growth rates in recent years.
Events in foreign exchange markets this week have shown although support for the higher yielding currencies is growing, we are still not immune to exchange rate volatility. After surging to a 6-month high against the US dollar and 3-month high against the euro, the pound shed three cents in 10 minutes proving that timing is everything when it comes to currency transfer. If you know your currency requirements in advance, a personal currency broker can provide you with the right information to help you make the most of your currency transfer.
Have a good weekend!