LONDON, Sep. 17, 2007 (Thomson Financial delivered by Newstex) -- Sterling's woes resulting from worries over the fallout from the Northern Rock crisis continued as the UK currency edged closer to the 0.70 stg per euro mark, a level not seen since April last year.
The pound has come under massive pressure since the news filtered through to markets late last week that Northern Rock had to seek emergency funding from the Bank of England. The pictures of panicked consumers queuing outside branches to withdraw savings has led to speculation of a crisis in consumer confidence and a knock-on effect on the housing market and the economy in general.
Market commentators are now expecting that the Bank of England will cut interest rates sometime over the coming months, a marked contrast to the expectation only a few weeks ago that they would raise rates. By contrast, most market commentators expect that euro zone rates will at least stay unchanged.
'The most obvious cause for this (the spike in euro/sterling) would appear to be the differing outlooks for monetary policy in the euro zone and the UK,' said Simon Derrick at the Bank of New York Mellon. (NYSE:BK)
'The net result of all this has been that euro/sterling has not only now broken out of the narrowing range that had defined trading since 2003 but is also accelerating rapidly. Indeed, last week's move was the largest weekly rally since November of 2005,' he said.
The euro today hit a high of 0.6950 against the pound, its highest level in fourteen months. The pound, meanwhile, also fell below the two dollar mark for the first time since the end of August.
Against other currencies, the dollar was steady after strengthening slightly against the euro and dipping against the yen overnight as market players awaited tomorrow's interest rate decision in the US.
Markets are expecting the Federal Open Market Committee to deliver a 50 basis point rate cut, but some are warning that the Fed could easily disappoint with only a 25 basis point cut.
HBOS analyst Steve Pearson noted that inflation concerns have by no means gone away and the Fed will not want to risk the 'moral hazard' of appearing to bail out those who have made flawed investment decisions.
'The US Federal Reserve and other central banks will have to be cautious. In the context of surging food and energy prices they dare not risk inflation expectations slipping anchor. This means that risk asset markets will not get the full adrenaline shot they are looking for,' he said.
London 1145 GMT London 0821 GMT
US dollar
yen 114.92 down from 114.94
sfr 1.1856 down from 1.1878
Euro
usd 1.3875 up from 1.3866
stg 0.6936 up from 0.6935
yen 159.48 up from 159.44
sfr 1.6454 down from 1.6473
Sterling
usd 2.0003 up from 1.9988
yen 229.84 up from 229.75
sfr 2.3716 down from 2.3742
Australian dollar
usd 0.8412 down from 0.8423
stg 0.4202 down from 0.4211
yen 96.63 down from 96.83
New Zealand dollar
usd 0.7118 up from 0.7116
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