Weekly US$ Rates and Comments - Week commencing 3rd September 2007

The markets became a bit calmer in the last few days as the news flow was less scary. But we shouldn't get complacent as I suspect there are still significant problems out there just waiting to see the light of day and when they do the markets will move very very quickly. Debt funding is going to be a problem for the medium term which is going to constrain growth. The Bank of England has not had to pump in the huge volumes of liquidity into the market place that the Fed had to in the US and the European Central Bank in Europe. This has enhanced the BOE's reputation but sterling is not looked at as a safe haven asset and as such will be under pressure when problems arise. The BOE meets this is week and is expected to keep interest rates on hold.

 

The US$ has weakened slightly and has held above the US$2 level at US$2.0184/£1 inter bank. The flight to safety meant that US$ treasury bills became a safe haven asset. Investors were even scared to leave their funds in banks in case they went bust! This benefited the US$ but as stability has returned we have seen the US$ slowly slide as it has significant economic difficulties; twin budget and balance of payment deficits, housing problems and now the first signs of rising unemployment. So no major upside for the US$ any time soon.