As the US sub-prime securitised mortgage fiasco worked its evil way further through financial markets investors continued to run for cover. The US Dollar was a beneficiary for two reasons. First, investors had to buy Dollars to cover short positions created by losses on their asset-backed security positions. Second, the natural home for money in search of safety is the US treasury market; it is very big and very liquid. The synergy of threes two factors attracted speculative buying by other investors who simply wanted to get on the bandwagon and the Dollar went from strength to strength.
So what to do?
Although the Bank of England did not join other central banks in flooding the money market with liquidity it does not mean that it will not now be having second thoughts about delivering another rate increase next month. Fortunately for Sterling the Euro, the Yen and the Swiss Franc are in the same boat and the prospect of a US rate cut has been heightened greatly. This ought to mean stability, at the least, for Sterling against the US Dollar but we have been reminded recently that interest rates do not count for a lot when there are much bigger fish to fry.
Buyers of the Dollar who followed Moneycorp advice last week will have been stopped into the balance of their purchases. Those new to the game should hedge half of their exposure at current levels and place protective stop orders in case of another major Dollar rally. Even though the main action has probably now been completed and a repeat of last week’s move is unlikely it would be unwise to ignore the possibility in markets like these.
