Euro Pounds Brief Thursday 22/02/2007

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Thursday 22/02/2007

• MPC vote 7-2 to hold rates; usual suspects voting for the hike
• US CPI rounded up causing dollar rally
• Fed minutes show dropping of tightening bias
• Yen pounded as BoJ warns that further tightening will be slow
• High yield currencies benefit from dovish BoJ
• Oil holds near $60 on US supply issues and inventory data fears

US Dollar:

The greenback received a boost in afternoon trade yesterday as US CPI data surprised to the upside with food
costs and medical bills showing marked increases. Housing however showed a drop which comes as no surprise
with some Fed members warning of a possible recession in the housing market.
Last night the Fed released the minutes of their January meeting showing that they are ready to drop their
tightening bias however they must be on guard against any spike in inflation and that they are ready to act
should this happen. In other news an independent economist from Harvard University warned that the huge
trade deficit that the US is running could lead to a massive drop in the dollar.

Pound:

Yesterday the MPC revealed that the vote was split 7-2 over the decision to keep rates on hold at 5.25% in
February. Known hawks Besley and Sentence voted for hikes citing inflationary pressures, strong money
growth and rising asset prices. However the minutes were viewed as dovish by the markets and the pound
was sold off following the release as comment showed inflation could undershoot the 2% target in the near
term, reducing bets of a rate hike in March. Overnight BoE economist Charlie Bean reinforced this sentiment
throwing doubt over the timings of any further rate hikes, if any at all. The MPC now may adopt a ‘wit and
see’ approach to judge the effects of their recent rate hikes.

Euro:

Eurozone hawks on the ECB board have hinted that they want rates to be at 4%, one more rise following the
expected increase next month. A string of hawkish comments from Mersch, Papademos and Liikanen failed to
rally the euro in a soft trading session. The euro lost out against the dollar and gave back its gains against the
pound. This move may have been exaggerated by Italian PM Prodi’s decision to hand in his resignation following
a humiliating defeat on a key vote on foreign policy.

General News:

• Following the BoJ’s decision to hike rates was followed by a statement late on that rates will be raised
very slowly according to BoJ Governor Fukui. This caused the yen to fall to all time lows against the
euro and prompted a fresh string of carry trades as risks of surprise hikes were ruled out.
• The main beneficiaries of the dovish BoJ were the high-yield currencies. Amongst the strong performers
were the Kiwi and Aussie dollars with rates of 7.25% and 6.25% respectively.
• The Canadian economy showed signs of a recovery as retails sales figures show strong growth.
• Oil held near the $60 level ahead of US inventory data due this afternoon following a chilly week stateside
and supply hitches at US refineries. Iran and North Korea continue to worry global markets with
their stance on Uranium enrichment. This morning oil is at $60.03.

Interbank foreign exchange rates:
Updated 22nd February
G BRITISH POUND / US DOLLAR 1.9493
GB POUNDS / EURO 1.4885
EURO / US DOLLAR 1.3095
GB POUND / JAPANESE YEN 236.22
GBP/AUD 2.4681
GBP/NZD 2.7638
GBP/ZAR 13.8576
GBP/CHF 2.4228
GBP/CAD 2.2640
GBP/SGD 2.9917
GBP/THB 66.000
GBP/HKD 15.2282