Dollar strength! Now there’s something we haven’t said for a while. Last week was the strongest for the Greenback since early 2004 with EURUSD dropping from 1.5631 to 1.5050 this morning and lows of 1.4928, and Cable has dropped over 3% with a high last Monday of 1.9835, compared to a low early this morning of 1.9138.

The FED, BoE and ECB all kept rates on hold as expected last week, with many analysts expecting that the next moves in the UK and Europe will be cuts. The Dollar was well supported by oil dropping to below $115 a barrel, helping to reduce inflation concerns but with the current conflict in Georgia we could see this creep back up due to supply concerns. We also saw better than expected home sales data, consumer spending and new factory orders for June, all helping to boost the Greenback. The Pound also suffered due to consumer confidence falling to another record low and major UK banks reporting falls in profits, and even losses in the case of RBS, due to the credit crunch. HSBC reported a 28% fall for the first half of 2008, Barclays announced another £2billion write-down, and RBS reported a write-down of £5.9billion and a first half loss of £691million, its first ever!

With the outlooks for both the UK and Eurozone economies worsening the days of 2 dollars to the pound look to be over. The key release this week is US retail sales on Wednesday where markets expect to see a slight rise, helping to maintain a strong dollar but with a hawkish MPC inflation report expected from the UK the same day, we should see a less volatile week for Cable with the rate remaining range bound between 1.89 and 1.9435.