Foreign Currency Exchange

Volatility dominated the US currency last week. The dollar fell sharply from 1.8550 to as low as 1.80. Lawmakers finally released the details of the $700-Billion dollar plan to rescue America’s financial system and end the credit crunch.

An agreement on this plan could well be positive for the Dollar and may bring much needed stability to the US markets. On the other hand, even if Congress can hammer out the details of a financial rescue, they may still come up short of reviving lender and investment confidence.

In most of the major failures that have resulted from the subprime meltdown, the final nail in the coffin has come from a panic withdrawal of deposits and capital as opposed to business-ending losses. Even if the immediate fears are purged, we are still left with the long-term economic consequences of this crippling period. Many market participants had believed the US economy was heading for a recession even before this fundamental stress was added.

Trying to forecast direction at the moment is proving relatively difficult, however we have to say that in the near future we may yet see further rate cuts by the Fed, which would put pressure on the Dollar and push Cable up further, until the latest fallout impacts in the UK once again or the BoE cut their interest rates. Fed Fund futures are now fully pricing in a 25bp rate cut for the October 29th meeting and there is a 32% chance that the central bank will act by slashing the benchmark by 0.5%.