Business | Markets
Sterling tumbles under rate cut expectations
Appeal of the euro-zone currency was diminished after Central Bank said it would reduce its returns for banks.
- Special to Gulf News
- Published: 22:40 December 20, 2008
Last week started with uncertainty over the fate of US automakers which also hurt dollar sentiment as the White House kept mum after saying it was considering tapping a $700 billion (Dh2,569 billion) financial industry bailout fund to help them.
However, the US government said it will provide up to $17.4 billion in loans to the Detroit carmakers crippled by the economic downturn.
Euro
The euro started strongly as the US dollar fell to two-month lows against the euro and a basket of currencies, pressured by uncertainty over the fate of the automakers and reduced safe-haven flows.
The dollar was starting to respond negatively to concerns about further weakness in the US economy, analysts said, after a run of weak data caused an exodus from risky positions and increased flight-to-quality buying in the currency.
The dollar fell to a two month low against the euro on Tuesday as expectations grew that the Federal Reserve will cut interest rates to near zero later in the day and may announce emergency tools to dispel a recession.
It also extended gains above $1.37 as repatriation flows into the dollar ebbed and technical players jumped back into buying the single currency to cover their short positions before year-end.
The euro fell suddenly in early London trade on Wednesday, as traders reckoned that its broad surge last week may have been overdone. The single currency is on track to post a weekly gain of more than 5 per cent against the dollar, its biggest since the euro was launched in 1999.
But the US dollar rallied against the euro on Friday, stemming from Thursday's European Central Bank deposit rates cut, which eroded the appeal of the euro zone currency.
Despite the ECB move, the euro is on track, posting a weekly gain of over 4 per cent against the dollar.
The euro also lost ground after the European Central Bank said on Thursday it would reduce the return it offers to those banks that hold cash with it, eroding the appeal of the euro-zone currency.
Range for previous week: $1.3364 - $1.4719 (Dh4.9085 - Dh5.4062)
Range for this week: $1.4650- $1.4850 (Dh5.3809 - Dh5.4544)
Yen
The Japanese yen which started the week climbing to its strongest level in more than 13 years as concerns about the global economy prompted more investors to abandon risky positions funded by cheap borrowing in the Japanese currency, ended the week dipping against US dollar on Friday.
This was after the Bank of Japan cut interest rates by 0.25 per cent to 0.1 per cent and after raising concern that the government would intervene in the markets to prevent the currency from gaining further and hurting the country's exports.
Range for previous week: 87.11 to 91.35 yen (Dh0.040207 - Dh0.042165)
Range for this week: 88.50 to 91.00 yen (Dh0.040362 - Dh0.041468)
Sterling
The pound hovered close to record lows on Monday after a survey reported another sharp fall in UK house prices.
Broad dollar weakness, however, helped the pound gain against the US currency as worries about the US economy and its stricken auto sector weighed on the greenback.
Property website Rightmove said UK house prices were down 6.3 per cent year-on-year in December and predicted they could fall a further 10 per cent by the end of 2009.
Sterling rose on Tuesday, recovering from an early slide to match a two-week high against a broadly weak dollar ahead of an expected interest rate cut by the US Federal Reserve.
Gains were limited and a poor UK economic outlook was seen keeping the pound near a record low against the euro, as data showing a limited decline in British inflation did little to shake expectations for the Bank of England to cut rates aggressively.
The pound found slight support against the dollar and the euro as some traders crept back into the UK currency following a deep sell-off for much of the year.
Sterling hit a record low against the euro and fell back against the dollar on Wednesday, as markets anticipated further UK interest rate cuts after the US.
By the end of the week sterling fell to a record low against a basket of currencies, buckling under the weight of rate cut expectations and poor economic data. Expectations that UK interest rates will fall further sent the pound tumbling to record lows against a basket of currencies, leaving parity against the single currency a very real prospect.
The BoE has cut UK interest rates by 300 basis points since October, but more cuts are expected in the New Year.
Range for previous week: $1.4809- $1.5586 (Dh5.4393 - Dh5.7247)
Range for this week: $1.485 - $1.5250 (Dh5.4544 - Dh5.6013)
- HSBC Global Markets Middle East
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