A strange week for sterling last week. You would have thought that sterling would gain against the US$ as the investment bank that had to be saved ten days ago was American. No, the markets seemed to take the view that as the UK was so dependent on the financial sector and the pre-eminent position of the City that any financial hardship anywhere was negative for sterling. We then had the City rumour mill in full flow as to financial stability of HBOS which was proved to be nonsense but again had a negative drag on sterling. Against this UK retail sales for February which were announced on Thursday were better than expected which has acted as a short term fillip. I am sure markets will be volatile for the next few weeks.
Following the saving of Bear Stearns last weekend and the Fed's decision to reduce US interest rates by a further 0.75% you would have though the US$ would be in freefall. Strangely not as the US$ gained against sterling and sits at US$1.286/£1 inter bank. It did lose ground against the Euro. Additional liquidity was pumped into the mortgage market through the relaxation of rules governing such companies as Fannie Mae. The US$ also gained from the fallout in commodity prices. I am sure there are more major problems just around the corner but the market is wondering if the prompt action by the Fed and the significant loss of value of the US$ against the Euro means that the pressure on exchange rates will be felt elsewhere.
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