Weekly US$ rates and comments - week commencing 2nd March 2009

Another false dawn for sterling started last week as news regarding the re-structuring of RBS, one of the many ailing UK banks, improved confidence in the financial sector and lead to broad gains against most major currencies. However, by close on Tuesday sentiment had turned against sterling and the UK banks thanks to reports of business investment having fallen steeply in the last quarter of 2008. Sterling fell further later in the week thanks to weak UK GDP figures that gave further evidence of a worsening recession in the UK. All of this combined with a poor reception to the government's 'Asset Protection Scheme', which will aim to protect the major banks' against £500bn of toxic debts with tax-payers' money meant that overall it was a bad week for sterling although sterling did steady on Friday and made marginal gains against the euro and the US$.

 

Regardless of how bad US economic data turns out, the seemingly invincible US$, currently at 1.421/£1, goes from strength to strength thanks to the flight to quality phenomenon which continues to keep risk averse investors invested in the US$ for lack of any other desirable or safe-haven assets available. All significant US data this week – the house price index, durable goods orders and annualized GDP figures were all worse than forecast but the effect on the value of the US$ was minimal. This over-pricing of the US$, and all of the currencies that move with it (AED, HKD etc…), will doubtlessly have some undesirable effects for parts of the US economy, such as making exports less competitive, but is something of a barometer for just how much uncertainty is still felt in the global markets.