AS I write this under a cloudy sky in London – a city nervous due to a nagging terrorism threat – you are reading this in Portugal and Southern Europe is contending with a catastrophic drought and bush fires. Taking this into consideration, the currency exchange rates may seem an unimportant side-show by comparison.
However, when you do have to move funds from the UK for living expenses or further expansion of your portfolio, or indeed back to the UK from property sales or for investment purposes, saving money against the painful bank exchange rates must be a useful topic for discussion.
The Sterling–Euro exchange rate has been relatively stable compared to the whirlwind elsewhere in the foreign exchange market. The US dollar, which had been the come back kid between April and July, performed a dainty U-turn when the US Federal Reserve Bank became less determined in its interest rate rises language. Their comments, suggesting the rate hike cycle may be coming to an end, came after a miserly revaluation in the Chinese yuan, which disappointed dollar bulls and allowed the USD to ease lower.
The yen is becoming the star performer as Japanese economic growth accelerates and the yuan effect is a major plus for China’s largest trading partner. Also, the reduced reliance on the USD, on the part of Chinese exporters, has allowed a period of Dollar weakness.
The euro is in the doldrums – a sentiment that matches the European Central Bank’s image. While the Italian economy is finally growing after nine months of decline, Italy is still pleading for an interest rate cut in Europe, but their calls are falling on deaf ears.
German growth still disappoints and the unemployment level both in Germany and France is causing great concern. However, many are expecting a period of radical change in Germany after the September elections, although they will be constrained by the Stability and Growth Pact. On balance, there are more reasons for the ECB to lower interest rates than to raise, but their intransigence is now legendary and no one is expecting them to act in either direction.
The Bank of England lowered its base rate in August by 0.25 per cent and then hinted heavily that we are not to expect further cuts. It leaves the pound with a 4.5 per cent base rate compared to the 2.0 per cent in the Eurozone and 3.5 per cent in the US. Game, set and match to the Pound, you may think, but the markets are less convinced. The BOE also mocked Gordon Brown’s re-jigging of the figures to mask his underachievement compared to forecast and the data from the UK is less than encouraging at the moment.
Nevertheless, the pound is doing remarkably well and the euro is equally strong against a beleaguered US dollar, damaged by yet another cavernous trade deficit (58.8 billion dollars in July), and the selling of USD by Middle East and Far Eastern central banks, as they restructure their reserve holdings. There are also rumours that major Middle Eastern players in the US stock and bond markets are investing less. Whether this is for political or economic reasons is unclear. What is certain is that the GBPUSD rate is back in the upward channel that dominated the pair for three years and that the GBPEUR rate is testing up to a six week high.
What is also certain is that, even though the US economy is showing 3.4 per cent growth, the dollar isn’t out of the woods yet. It looks increasingly as though it may carry on declining in a general pattern and that leaves scope for sterling and euro strength. Which of these two will weather the storm better is open to extensive debate.
Contributed by David Johnson
Commercial foreign exchange dealer
Halo Financial Ltd
