US Dollar Update – avoid the risk of continued downside

Sterling has continued its slide since last week’s update. Mervyn King’s comments expounding the benefits of a weak pound continue to weigh on the market, giving traders little comfort in holding the pound. In other news, commentators are speculating that the Bank of England could introduce negative interest rates on bank deposits held at the central bank. By penalising the banks for holding large cash reserves the BoE would hope to stimulate bank lending and improve the pace of economic recovery. The downside for sterling however, is that such a move would likely prompt a fall in interbank interest rates (as there would no longer be an interest rate advantage to holding cash), making sterling even less attractive. The Swedish Riksbank has already done exactly that, pushing market interest rates down to just 0.25%. Meanwhile, the US dollar has been rising slightly against the Euro, and taking advantage of sterling’s weakness to rally back below the 1.60 level. We also traded below the June low yesterday (1.5802) which adds to the technical pressure building against the pound. The US is widely perceived to be recovering at a faster pace than the UK, which is lagging. That means the Federal Reserve may remain ahead of the curve when it comes to reversing quantitative easing. We advise clients with USD requirements to cover at least half now to avoid the risk of continued downside.