Weekly US$ rates and comments - week commencing 17th September 2007

Northern Rock did for sterling. Even though Northern Bank is profitable it got caught by having short term funding to cover long term loans to clients. Given the credit crunch it found it very difficult to borrow from the inter bank market. Other banks are having to hoard cash for the huge amounts of funds they have lent to large private equity deals and which they are unable to on sell to other financial institutions. Hence the need for the Bank of England to supply short term funding to Northern Rock. Sterling had been falling ever since the BOE decided to hold UK interest rates at its meeting in early September. I suspect that the situation has been over dramatised and that sterling is oversold but it may well take time for sterling to recover.

 

The US$ has benefited from sterling’s problems and pushed back to US$2.002 inter bank. However the US$ has its own problems. The Fed met this week reduced US interest rates by 0.5%. This was viewed as a pre emptive strike but the US has major problems which have to be overcome before we see any long term strengthening from the US$ and a recession still seems likely. So don’t expect to see too much upside for the US$ against sterling.