Sterling falls as investors look to safety of US dollar

Published: 07 July, 2011

An interest rate hike in China and euro zone peripheral debt worries saw investors looking towards a safe haven in the US dollar yesterday, causing sterling to fall.

Currency rates - July 7

EURO/GBP - 1.1180
US$/GBP - 1.5995
CHF/GBP - 1.3410
CAN$/GBP - 1.5435
AUS$/GBP - 1.4892
ZAR/GBP - 10.748
JPY/GBP - 129.46
HKD/GBP - 12.448
NZD/GBP - 1.9330
SEK/GBP - 10.157
US$/EURO - 1.4300

The Bank of England is today expected to leave interest rates at a record low of 0.5% despite inflation running at more than double its 2% target. Interest rate expectations have been pushed back until at least next year and there has even been speculation that the Bank of England may opt to restart its Quantitative Easing programme to try and stimulate demand in the economy.

In the euro zone, the euro slipped after credit rating agency Moody's downgraded the Portuguese government debt rating. This morning it slipped to a low against the US dollar as the agency downgraded Portuguese banks' government backed debt. A widely expected interest rate hike from the European Central Bank on Thursday should lend it support. Greek bondholders are today meeting with officials in Paris to discuss a proposed rollover of the nation's debt as EU leaders insist that private investors contribute to a new aid package for Greece after last year's 110 billion-euro ($159 billion) rescue.

In the USA, the US dollar strengthened against most currencies as an interest rate hike by China prompted investors to shed exposure to riskier assets in a market already rattled by a downgrade of Portugal's debt rating to junk status. China's 3rd interest rate hike of the year saw investors increase demand for safe haven assets, as US non-manufacturing data also dropped on last month. Friday sees US non-farm payrolls figures, which could provide a boost to the US currency if they come in better than expected.

Elsewhere, the Russian ruble slid to its lowest level in a week versus the dollar as oil, Russia's major export, declined after China's central bank raised rates. In Thailand, the new PM elect Yingluck Shinawatra stated that the Thai baht will remain as a free floating currency.

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