US Dollars:
$44 billion was wiped off the FTSE 100 leading shares after the Dubai crisis prompted nervous investors to pull out of riskier yielding currencies and buy back into the dollar, a move strengthening the currency against Euro, Sterling and other majors. The market turmoil follows news that the government owned conglomerate Dubai World had asked its creditors for a six month debt moratorium. The price of crude oil fell by almost $2 a barrel and traders shunned the riskier euro and sterling and looked to the Swiss Franc and U.S dollar for investment. The problems in Dubai have raised expectation of a ‘double-dip recession’ in 2010, indicating the global credit problem still exists, and will continue to hamper efforts of increased growth in countries previously believed to be emerging in good shape from the credit crunch.
The dollar had gained ground on sterling as GBP/USD stands at 1.6350 currently, while EUR/USD saw the dollar fight back previous euro gains at 1.4890 currently. Eyes are on the market to see if it bounces back from this set back in Dubai.
Pound:
Sterling is trading another 1.19% down against the USD this morning to 1.6333 as investors flee riskier currencies like the pound for the safe haven US currency. Against the Euro the pound is still trading down below 1.10 but is continuing to trade within small ranges around the 1.0975 area. Dubai’s shocking move to restructure Dubai World and delay some of its loan repayments on the company’s $59 billion of liabilities made yesterday an unusually busy day in the financial markets despite the US favouring a turkey lunch over a working day. The news which first emerged yesterday morning significantly dented share prices particularly in banks (including the UK) and saw a big sell off in riskier currencies like our dear pound. This latest round of financial news which is likely to hang around and undermine the pound for days if not weeks was the last we needed as the market seeks a reason to buy sterling.
Investors continue to ponder over when the UK recovery will gain pace together with a change in monetary policy direction by the Bank of England to include interest rate hiking. With GDP revisions for last quarter showing (on Wednesday) a slight improvement to –0.3%, the question now lies over what this quarter we are in will bring, e.g. will the data show we are out of a recession? These concerns were highlighted by Geraldine Concagh, economist at AIB Group Treasury saying “The GDP data saw a modest upward revision, but that has not changed the bigger picture that the UK is lagging other countries such as the euro zone in terms of its recovery,” . In political news (a road I don’t like to go down) Mr. Darling is expected to come clean in next month’s pre-Budget report that the recession has been much deeper than he forecast in March, according to the FT (what a surprise!). These comments are likely to highlight that the economy contracted by a massive 4.75% in 2009, over 1% more than originally predicted in the Budget.
Euro:
The risk sensitive euro was hit hard on the Dubai news, with all shares tied to the currency being sold off in an attempt to weather the storm. The ongoing quick unwinding of risk trades should be contained by policymakers before it becomes a Lehman Brothers-like-mess, but it could cause some damage in the meantime. Its not clear whether the markets are overreacting though, as we could be seeing a knee-jerk reaction. It all depends on how much exposure people really have to Dubai. Once we know that we’ll know how long lasting the effect is going to be, and how long this current Euro weakness will last. Sterling was hit worse than the euro though, with sterling investors few and far between on the Dubai news. Current GBP/ EUR rate is down to 1.0989, with EUR/USD starting to come back but still down at 1.4890. I will be dancing around at a Brazilian
themed party this Saturday, have a great weekend!!!
Quote of the Day
“Obstacles are things a person sees when he takes his eyes off his goal.” – E. Joseph Crossman
