A week ago it seemed that the Dollar would be able to rise above the financial market turmoil by virtue of its status as a ‘safe haven’ in times of trouble. Any such hopes were dashed last week as it became clear that the US economy was at greatest risk to the trashing of the securitised debt market. Investors now fear a vicious circle in which a lenders’ strike and a widening of the interest rate premium for non-prime borrowers could reduce demand among home-buyers, further depressing prices and turnover. There was little help for the Dollar to be found in the US economic data; almost the only good news came, amazingly, from an improvement in consumer confidence. Elsewhere, personal consumption was stagnant and many data fell short of forecast. Without doubt the worst figures came in Friday’s Non-farm Payrolls report. New hirings had been expected to reach 127,000 in July: Not only was that number way to optimistic, a revision to the June figure meant that the overall effect was a shortfall of more than a third. The news heightened expectation that an employment slowdown could mean lower US interest rates sooner than previously thought.
Sterling experienced mixed fortunes; ahead against the Dollar and the high-yielders, steady or lower against the others. Its movements were driven not by the data but by swings in attitudes towards risk and the fortunes of credit and equity markets. UK economic data offered a mixed bag of pointers that did nothing to alter the big picture. The Monetary Policy Committee’s decision to leave the Bank Rate unchanged was similarly inconclusive: Economists had not been expecting a move and nobody was surprised or disappointed when nothing happened. Analysts saw nothing last week to change their opinion that the Bank of England will raise interest rates at least one more time from the current 5.75 per cent level and that expectation was Sterling’s most important prop.
So what to do?
The threatened ‘safe haven’ Dollar rally has not materialised and Sterling is once again looking perky. This ought to mean further gains to come. But this mortgage game has not even reached half time yet. It is entirely possible that another mind swap among investors will move the goalposts once again. In the short term investors will be nervous and exchange rates could be volatile.
Buyers of the Dollar should approach this volatility firstly by hedging their requirement and secondly by ensuring that the correct stop order, or orders, are in place to avoid getting run over by a major Dollar rally.
For more information and expert guidance on the currency markets, contact Moneycorp
Source:Moneycorp
