By: DAVID JOHNSON
THE STERLING-US Dollar exchange rate hit its highest level in 26 years this month, as did the Euro-US Dollar rate and many banks now see Sterling as the most vulnerable currency which stands a very good chance of falling much further.
The Euro remains supported by the talk of central banks moving their reserves from US Dollars into other currencies. Even the Nigerian Central Bank is planning to diversify its reserves away from the US Dollar and the Saudi Arabian authorities are talking of removing the peg which links the Saudi Riyal to the US Dollar. All of this comes at a time when US Treasury Secretary Henry Paulson is still speaking of his department’s support for the principle of a strong Dollar. After a seven year decline in the US Dollar’s value, traders are taking Mr Paulson’s rhetoric with a pinch of salt the size of Belgium.
But I guess if you are going to buy a currency other than the US Dollar, what better currency to choose than one where interest rates are on the rise and which is used by more than 700 million people.
This view continues to strengthen the Euro but the ludicrously strong Euro has worried the European Central Bank so thoroughly that they have even started to drop heavy hints that they may intervene in the markets and sell large volumes of Euros if their currency strengthens further.
With so many factors pulling and pushing the Euro hither and thither, it is no surprise that we are in the midst of some of the most volatile trading conditions that traders have witnessed in years. The Euro seems certain to test the UShttp://www..50 level and may continue to hammer Sterling until one Euro buys 72.5 pence (that’s approximately €1.3800 for each Pound).
The Sterling side of this equation is dominated by the ongoing Northern Rock debacle and the disclosure that another UK mortgage lender, Paragon, is also being damaged by the credit crunch. This company specialises in the buy-to-let market; further proof that the lack of market liquidity is clearly having a far more far reaching effect than many had hoped it would.
We cannot rule out the possibility of further such disclosures and that underlies Sterling’s inability to sustain any kind of rally.
And the stories don’t stop there. Will the increasingly disruptive French strikes damage the Euro? Will the German transport strikes hamper the German economy? Will the Bank of England finally get a grip on the UK credit market or will we slide ineffably into a deeper credit pit and will the US Federal Reserve’s downgrading of its US inflation forecast be enough to calm nerves or will they have to cut interest rates to avoid an economic recession?
I don’t have the answers to these and we can only speculate as to the outcomes of such factors. However, I can see each element having its effect on the Sterling-Euro, Euro-US Dollar and Sterling-US Dollar exchange rate triangle.
What is clear is that there is no way every one of these matters will resolve itself simultaneously and it is the timing of each piece of news that will create continuing volatility and therefore, opportunities for both buyers and sellers to do well. As with comedy, it is all about the timing.
David is a Currency Dealer with Halo Financial Ltd, delivering competitive exchange rates and a personalised service to help property investors, holiday home buyers and migrants throughout Europe save time, money and hassle on their foreign exchange transactions. For more information, please email [email protected] or call 0044 207 350 5474