By: DAVID JOHNSON
David is a Director of Halo Financial Lt, a company which provides exceptional exchange rates and foreign exchange information for currency transactions involving migration and overseas property investment as well as services to companies involved in international trade
2007 finished with a bang and a whimper as Sterling’s illusion of strength burst in spectacular fashion leading to a dive in the Pound’s value in advance of an expected Bank of England interest rate cut.
The whimper came in the guise of an absence of Eurozone interest rate hikes in spite of the positive rhetoric from the great and the good at the European Central Bank.
2008 started with a continuation of the Sterling slide, which brought the pound to its lowest ebb against the Euro since the inception of the single currency in 1999 and its lowest showing against the basket of European currencies in 12 years.
However, the expected Eurozone interest rate hike has still not materialised even as European Central Bank President, Jean Claude Trichet, continues to hold out the threat of higher Eurozone borrowing rates in a bid to temper inflation busting wage settlements.
Elsewhere, the Swiss Franc, long the source of loans to fund investments into higher yielding currencies, is strengthening rapidly as risk-averse investors are unwinding these ‘carry trades’ and as even more risk averse investors are buying the neutral country’s currency.
And the Japanese Yen, which has also provided funding for carry trade type investments, is trading at its strongest levels against the US Dollar and Pound in 18 months.
The Australasian currencies, not to be outshone, are also at some of their strongest levels in years.
The New Zealand Dollar has not been stronger against the Pound in over two years and the Australian Dollar, even more dramatically, is testing the lowest exchange rate against sterling in a decade.
With the highest yielding currencies making the greatest gains, it is pretty clear to see that some international investors are still seeking high yielding offers and are prepared to take some currency risk in order to do so.
However, with the traditional safe havens of Swiss Francs and gold reaching record highs (over 904 dollars per ounce at the last count), it is also clear that fear is a driving factor.
In fact, 2008 is starting with very cloudy waters and they are likely to be further muddied with the resolution of the Northern Rock debacle almost certainly involving the nationalisation of the beleaguered bank.
Each new week brings yet another bad debt revelation among international banks and institutions.
Confusion reigns and it looks like it may be many months before we have a clear indication as to where the Pound’s weakness may end, where the Euro’s resilience may falter and when the US Dollar’s recovery may run out of steam.
Of course, it may even be that none of these scenarios will develop.
We may find that the Pound is in a bottomless slide and that the European Central Bank has no plans to raise interest rates but will actually start to cut their lending rates before the year end, and the US Dollar could even have already changed direction completely and may now embark on a three year strengthening cycle.
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