We still live in interesting times. The banks are very cautious about lending to each other as they are still unsure where the losses relating to the bad US home loans finally end up. Also the banks are having to hoard cash as they are likely to find it very difficult to offload all the debt they have taken on funding the numerous private equity deals we saw in the first half of this year. In the midst of this uncertainty the Bank of England took the prudent approach and kept interest rates on hold. The BOE did take an unusual step by making an announcement stating that they were concerned about the credit markets and thought this uncertainty would dampen inflation in the short/medium term and this has led the market to believe that increased UK interest rates are also unlikely in the short to medium term. Since this announcement sterling has steadily lost ground against the Euro.
The US$ is in trouble weakening to US$2.029/£1 inter bank. Non farm payroll figures showed a reduction [i.e. unemployment is on the up] last week. This was against market expectations [not sure why, it had to happen sometime soon!]. Is the US heading for recession? Will the rest of the world going to follow along? My guess for the first question is yes. For the second difficult to say as the Far East is still growing and becoming less dependent on the US by the day. But strangely the US has to go through tough times for the markets to regain confidence in the US$. However, this is unlikely to happen for a while. The Fed meets soon so we wait to see their thoughts and insights for the way ahead.
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