Foreign Currency Exchange

Last week risk aversion dominated all markets, and the demand for liquidity and security has sent panicked investors to the US dollar.

However, with the world’s largest economy wading slowly into a recession and interest rate speculation pointing to the lowest returns from US assets in history, how long can the greenback’s rally last?

Meanwhile GBP dipped below the 1.53 level against USD, and we may yet see Sterling looking to test Friday’s low of 1.5257 as U.K. Prime Minister Gordon Brown hinted at further easing with these comments “Inflation is actually coming down over the next few months and that will mean that it gives scope to all the monetary authorities, including the BoE, round the world to make a decision about interest rates. Speculation has increased that world leaders will use the Federal Reserve meeting this week as an opportunity to launch another coordinated rate cut.

Economists in the US are expecting a 25bps cut to 1.25%, but many market participants have already priced in a 100% probability of a 50bps cut and even a 46% chance that the MPC will take the benchmark rate all the way down to 0.75%.

Central bankers will, however, need to consider whether such a move will help (as previous easing hasn’t yielded the intended effects with banks not passing on the savings), and if it will instead just invite more problems when the global economy actually recovers.

Other key data out this week following the Federal Rate Decision meeting on Wednesday, will be the advanced reading of the 3Q GDP.

In simple terms there is very little doubt that the US is already one foot into a recession, but despite all of its horrendous fundamentals, the U.S. economy is still viewed as the best positioned to emerge from the crisis first, which may continue to be a supportive factor for the US Dollar.