Why are Sterling/Euro & Dollar exchange rates falling?

Friday 23rd September 2011

Good morning. It was a very volatile day in the currency markets yesterday. Notably the GBP/USD exchange rate dropped to a 1 year low, after the Federal Reserve warned about significant downside to the U.S. economy and triggered broad risk aversion in financial markets.

As the Dollar is a safe haven currency, it strengthened. The 1 year low is even more remarkable when you consider just a few weeks ago it was near a 2 year high! This is how rates fared throughout trading yesterday:


Markets fall as FED and others warn on growth

Yesterday the Federal Reserve warned that the US economy faced significant downside risks. The news sparked panic in the markets, and was one of only a series of grim warnings about the global economy.

Christine Lagarde, head of the International Monetary Fund, said the economic situation was entering a “dangerous place”. Earlier, the president of the World Bank, Robert Zoellick, said the world’s economy was “in a danger zone”. The comments came after the Federal Reserve warned that the US economy faced “significant downside risks”.

Also on Thursday, US Treasury Secretary Timothy Geithner said that the eurozone crisis and the political divisions in the United States were the biggest threats to the global economy.

So what does all this mean for the currency markets?

It signals significant worries about the global economy. In times of uncertainty, generally perceived safer currencies get stronger, and risky currencies weaken. This is exactly what we saw yesterday, with the safe haven US Dollar gaining significant strength throughout the day. It fell to a 1 year low, which is over 10 cents down from the 2 year high we saw a matter of weeks ago.

Riskier currencies including Sterling didn’t fare as well. The Pound fell against other currencies, as investors fled from risk and rushed to move funds to Dollars. This is why we saw a general drop in most major GBP exchange rates throughout trading yesterday.

What do the analysts say?


“There’s just a mad scramble to own dollars today, standing in front of the dollar is like standing in front of a moving bus. People are looking at what the Fed did last night and saying there is no new money being made available,” said Michael Derks, chief strategist at FX Pro.

“The BoE doesn’t help sterling, additional QE looks baked in the cake over the next couple of months. The global demand for dollars shows absolutely no sign of slowing”.


Summary

It’s incredibly hard to know which way things will go, but what is certain is that the volatility is likely to continue, while there is no real sign the global economy is going to recover any time soon. This will weaken riskier currencies such as the Pound, so it could be that GBP/USD rates continue to drop.

Against the Euro it’s harder to call, as falls in the rate have been largely limited due to the ongoing EU debt crisis keeping the Euro weak and propping up GBP/EUR rates somewhat. Without these debt issues, it’s likely Pound vs Euro rates would be significantly lower than they are at the moment.

If you have currency to buy or sell in the coming months, the best course of action is to contact us for a free consultation on your particular requirements. I can then explain the different options available to meet your needs, and ensure you don’t get caught out by adverse exchange rate movements, and achieve the best exchange rate possible.

On Monday we’ll have a detailed look at this weeks movements in the currency markets, particularly against the Euro and US Dollar.

Have a great weekend.

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