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Sterling ahead on the week

Sterling gained more than half a cent against the Dollar over the week but did it the hard way. A rally last Monday morning was followed swiftly by a decline that took it down almost to $1.92 on Wednesday. A sharp recovery brought it back up to Monday's level and the Pound touched as high as $1.95 on Friday before falling back once again to the week's opening level. The beginning of this week brought steadier support in the Far East and it opened in London at $1.9450.

Sterling was hit last week by news of further problems among what they are calling the "sub-prime mortgage lenders" in the States, companies that lend to people who would not otherwise be able to secure credit. Their low initial interest rate is increased sharply after a year or three and many borrowers have been unable to meet the higher payments. New Century Financial Corp was the one in the headlines last Monday and there were apparently others in the queue. Although there is no direct link between these dodgy lenders and the British Pound the news once again spurred investors to offload riskier assets. Because of Sterling's involvement as one of the high-yielding currencies in the "carry" trades more positions were closed out and Sterling felt the heat.

That the US Dollar only lost half a cent or so to Sterling last week does not tell the full story. Against the Euro it lost two cents in a steady and orderly way. The US economic data tended to be lacklustre with retail sales, producer prices and inflation all doing just enough to avoid being labelled as weak. There was good news on the current account deficit, which was narrower, and bad news from two regional Federal Reserve Bank surveys of the manufacturing sector, one of which was down a little and the other down a lot. Consumer confidence was lower in March according to the University of Michigan. When the Federal Open Market Committee market Committee meets this week it will probably not make any change to the 5.25 per cent Federal Funds rate but nobody is very sure about what will happen next, or when. The FOMC might prefer to raise rates one more time but it will be cautious about pouring gasoline onto the smouldering residential property market and mortgage markets.

The past week has offered a reminder that confidence is a fickle thing. There is no reason why Sterling should have been hosed because of problems among North American lenders but that is what happened last week. The currency market is trying to calm down but all it needs is somebody to shout "Boo!" and it runs for cover.


So what to do?

Volatility is still a threat. Buyers of the Dollar can hope for further improvements for Sterling but should protect themselves with stop orders in case it falls back.

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