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Sterling flounders after downbeat comments

Published:  29 September, 2010

Currency exchange rates daily analysis for September 29 from Smart Currency Exchange.

Sterling fell by over 1% against the euro yesterday after downbeat comments by a key Bank of England policy maker left sterling floundering despite hitting a seven week high of $1.5896/£1 against the US dollar.

Currency rates:
EURO/GBP - 1.164
US$/GBP - 1.586
CHF/GBP - 1.544
CAN$/GBP - 1.628
AUS$/GBP - 1.631
ZAR/GBP - 11.022
JPY/GBP - 132.58
HKD/GBP - 12.303
NZD/GBP - 2.142
US$/EURO - 1.362
HUF/GBP - 321.47

In a speech to the Hull Chamber of Commerce, Monetary Policy Committee member Adam Posen said that the central bank should start pumping more money into the economy in order to avoid a prolonged slump of the sort that Japan saw in the 1990's. The markets were not expecting the negative comments and they contrasted sharply with his colleague Andrew Sentance who stated that the Bank didn't need to restart the Quantitative Easing programme. Sterling hit a low of €1.1634/£1 and $1.5720/£1 following Posen's comments despite strong data elsewhere.

The UK's trade deficit showed a stark improvement, jumping from -£9.6bn to -£7.4bn which shows that exports are improving. In addition, a survey by the CBI showed a marked increase in sales volume amongst retailers which was positive. However, this data was surpassed by the panic that the unexpected comments made.

In the Euro zone, it was a mixed day. Initially, the euro fell against the US dollar after speculation that Spain's credit rating may be downgraded further by rating agency Moodys. However, weak US data and comments from European Central Bank Board member Juergen Stark helped boost the euro. Mr. Stark stated that the ECB may not renew some of the monetary support measures when they expire later in the year. In addition, there were reports that a former Chinese bank adviser had described the US dollar's devaluation as "inevitable". In terms of data, consumer climate data came in better than expected. There is no real data out today - although the euro is expected to give back ground to sterling as the annual EU farm subsidy is converted into sterling.

In the USA, the US dollar suffered yesterday as concerns remained over further Quantitative Easing by the Federal Reserve. This is expected to be announced at the end of the Fed's next meeting on November 2-3. Gold yet again hit a record high today, and US bond yields followed suit as investor confidence plummeted and investors looked for safer haven assets to invest in. Consumer confidence fell in September after poor business conditions and weak employment figures. This, combined with the fact that house prices fell to within touching distance of multi-year lows in July saw the US dollar drop further.

Elsewhere, the Japanese yen has strengthened back up to pre-intervention levels against the US dollar. This sparked concerns that the Japanese government will step in to the currency markets in order to maintain an artificially weak currency and protect their export market.

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