UK Rates Unchanged

Tom Tong09/Sep/2011Currency Updates

GBP

The pound rose yesterday, reversing losses earlier in the day, when some investors sold the UK currency on the chance the UK central bank may add to its 200 billion pound asset-buying plan to breathe life into the weak economy.

Sterling rallied broadly, scaling the day’s highs against the dollar and the euro after the Bank of England’s decision to keep policy unchanged surprised some investors who had betted on more economic stimulus from the central bank.

Britain’s central bank left interest rates at 0.5 percent, in line with market expectations, and left open the option of restarting its quantitative easing programme should the economy weaken further.

EUR

The euro fell to a two-month low against the dollar after European Central Bank President Jean-Claude Trichet highlighted downside risks to the euro zone economy, signalling no rate increases in the near term.

He said that looking ahead, a number of developments seem to be dampening the underlying momentum in the euro area, and the factors that were slowing growth included “on-going tensions” over the high levels of sovereign debt in the eurozone, falls in business confidence, and the weakening of the global economy. “As a consequence, real GDP growth is expected to increase very moderately in the second half of this year”.

USD

A record level of exports and a drop in oil prices narrowed the U.S. trade deficit in July to its lowest point in three months. The jump in exports could give the economy a lift at time when it is at risk of another recession and the trade deficit fell a 13.1 percent from June, the Commerce Department reported.

Federal Reserve Chairman Ben Bernanke Thursday offered a mild critique of the U.S. political process for making fiscal decisions, calling for a better system to avoid the debt ceiling standoff that caused so much disruption to financial markets and led to a U.S. sovereign rating downgrade.

Low inflation means that the buying power of the dollar, in terms of domestic goods and services, remains stable over time, “Specifically, in the medium term the value of the dollar depends basically on two things, its inflation rate relative to other inflation rates in other countries, and it depends on the strength of USA economy.” Having kept inflation lower than most countries, and currently trying to grow the economy, the Fed’s mandate “is consistent with a strong dollar policy,” he said.

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Written by Tom Tong

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