Another volatile week as far as the US dollar goes, as the Greenback fell to four month lows on cable and record lows against the Euro. Confidence was sapped as rumours surrounding a troubled US bank turned to seizure by the regulatory Fed body. Firstly, mortgage lender Lndymac Bancorp hit problems which was followed with government intervention to support Fannie Mae and Freddie Mac, who between the two account for 50% of all US mortgages. As the dollar fell in response to a lack of confidence in US financial markets, lower corporate profits and growing inflationary pressures, global stock markets also headed south as oil which as a hedge against a weak dollar hit a new high of $147 per barrel and further exasperating future pain. Bank shares took a hammering in response to US financial failures. The Dollar fell to 1.6030+ against the Euro and 2.0130 Sterling. The Greenback also pulled back against the Japanese Yen and Swiss Franc to 103.71 and 1.0105 respectively and would suggest “carry trade” reversals in response to lowered risk appetites from investors. The dollar was further squeezed against the Euro as ECB members suggested that interest rates are likely to rise again in Europe to counter inflation and hence further the interest rate yield differentials between the greenback and Euro. The Aussie dollar rose to 25 year highs against the US dollar after the Australian Central bank indicated keeping interest rates at 12 year high in response to higher inflationary pressures. In a speech to congress, Fed Chairman declared “downside risks to growth” and further “upside risks to inflation”. He also added that the priority was financial market stability anddid not rule out market intervention to support the dollar.
In the UK, further bad news for consumers as CPI inflation jumped to the highest level in 11 years as price growth rose to 3.8% and house prices fell by the largest June decline since records began in 1978. Mortgage approvals fell to the lowest in 9 years suggesting banks are still reigning in their appetites for new mortgage approvals and consumer spending fell 0.4% Yr / Yr. Jobless numbers showed a jump to a record 16 year high for June.
On a brighter note interbank lending rates fell by around 0.45% suggesting either increasing competition for banks to lend or an assumption that interest rates are going to fall in the UK. Certainly many economists are suggesting that UK rates will be kept on hold until the end of the year in order to keep the pressure on fighting inflation. In response, the economy will slow and return inflation to lower levels over a period of time. They maybe speculating that interest rates will fall aggressively next year to stimulate the economy. On that basis Sterling may have further to fall especially against the Euro as lower interest rates get factored in and the assumption of higher rates in Europe will lead to the yield differential narrowing. Forward premium points are narrowing further out into next year. Sterling was still trading in its cycle against the Euro hitting 1.2650 before falling back to 1.2573 on Friday.
However, oil prices fell back to $129 per barrel and the dollar regained some composure to trade up to 1.5821 against the Euro on Friday. The International Monetary Fund gave a rather more bullish outlook for the UK revising annual growth upwards to 1.8%.