by Jon Beddell
Foreign Currency Market Update – GBP / USD Update
A sharp bout of risk aversion has swept the markets over the last week as investors dumped the euro on escalating fears over the single currency’s future. The Euro has plunged by up to 9% against the US dollar in May, with Sterling notching up a 7% fall over the same period. Investors have been buying into the traditional “safe haven” of the US dollar and Japanese Yen, both of which have strengthened sharply in May. The worst affected currency group has been the high yielders like the Australian dollar and South African Rand. These are the currencies that benefitted most over recent months as investors sought risk and higher returns. As those positions are unwound, these currencies have been hard hit, with the Aussie dollar falling by 12% against the US dollar in May.
UK retail sales rose 0.3% in April, but markets barely noticed. Minutes from the latest Bank of England meeting confirmed the view that interest rates will stay low for while yet. Again, no reaction. The sole focus for Sterling right now is the emergency budget to be announced on June 22nd. Investors are looking for information on how bad the deficit is, and what measures will be taken to address it. Until we have a clear fiscal tightening plan in place, sterling will struggle to sustain credibility while investors remain nervous. The FTSE 100 index of leading UK stocks has plunged by over 15% over the last four weeks, wiping out billions in market value and prompting investors to reassess their attitude to risk. In the US, the Dow Jones index is also down, around 12%, but notably the losses have not been as steep as in the UK. That reflects the market perception that the UK will be worse effected by the European currency crisis. For its part the Euro has failed to take comfort from the €750bn stabilisation package backed by EU countries, the EU and the IMF. There is open talk of whether any countries will exit the single currency, and what steps would need to be taken in order to achieve an exit. A speech by German chancellor Angela Merkel announced a ban on naked short selling of certain securities, but her acknowledgement of the seriousness of the Euro’s crisis sent markets nose diving around the world. The rumour mill was given fresh fuel yesterday when the Spanish government nationalised a small savings bank.
The Sterling/Dollar exchange rate is being driven by risk aversion. If stock markets can find support and rally, then sterling will follow as investors start to tentatively move away from the dollar. However, if stocks continue to sag, the dollar will remain strong.
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