US Dollar Continues To Suffer As Third Quarter Begins

As we move into the third quarter of the year, the currency markets are under stress, as various worldwide economies have had to scale down their forecasts for growth and for some a double dip recession is still thought possible. The movements of the last few weeks have bought about a steep drop in Sterling against the Euro with the currency falling from above 1.21 against the Euro to the four month lows of the 1.15s. The Dollar is yet weaker, with the US currency therefore losing out to both the Euro and the Pound. Uncertainty still hangs over the currency markets, with other ‘safe-haven-currency’ nations such as Japan and Switzerland contemplating taking action to intervene in the currency markets and weaken their own currencies in order to protect their exports and therefore their recoveries. To start with the Pound, the latest economic data has not been all bad. Today for example, saw a surprise improvement in the construction sector. The problem for Sterling at the moment is that many of the data releases have been generally disappointing, as well as the fact that any positive news tends to be over-shadowed by what is going on in terms of larger economic policy with increased differences of opinion between the Bank of England members. Following very poor public finance figures several weeks ago, showing higher than expected levels of debt, all eyes are now on the details of budget cuts to be announced later this month. At the same time, the latest Bank of England minutes showed that ‘increased stimulus’ for the UK economy was now thought of as increasingly likely. This has been followed up by the comments of Andrew Posen, policy member, who has called for further stimulus against the calls of Andrew Sentence, another Bank of England member, for an interest rate rise, suggesting that there may well be a three way split at the next meeting. The situation in the US makes for even worse reading with the US Dollar receding against most other major currencies and finding its way to a six month low against the Euro. The US Dollar Index, which measures the Dollar against a basket of currencies is heading back down to levels last seen in January. Speculation over further financial stimulus is even more rife in the US than the UK, with the Federal Reserve Bank of New York President being the latest to speak out about the need for stimulus measures to calm the ongoing unemployment levels and inflation problems. Last week ended with poor manufacturing figures adding to the negative sentiments surrounding the economy. Later on Monday is a speech by the Federal Governor Bernanke which will be keenly watched by investors to see if any chances of further stimulus are mentioned. And how long can the Euro maintain this level of strength? In truth, the Euro seems to be benefiting largely from the relative weaknesses in other economies rather than growing from its own internal strength. There have of course been some positive factors at play. A string of successful bond auctions as well as comments from China over the weekend that they would buy Greek bonds once Greece returns to the bond markets is good for investor confidence – the latest investor confidence figures also showed an improvement. There is a deep vulnerability in the Euro however which is stemming from the mounting fears surrounding debt, with the new headlines last week regarding the vast costs incurred by Ireland necessary to bailout the Anglo Irish bank. This, alongside the ongoing worries surrounding other nations such as Spain who had their credit rating downgraded by Moody’s last week, makes the Euro far from safe, even if for now it is largely dominating. With rates being as they are, this is an ideal time to arrange or fix the rate in advance for any transfers involving selling Euros into Pounds or Dollars. If you do have an upcoming transaction that will involve you exchanging another currency into Euros, then we can also help you protect yourself from any further drops and minimise your losses.