Dollar and sterling fall on back of interest rate fears

THE DOLLAR declined yesterday to the weakest level against the euro since before the bankruptcy of Lehman Brothers on speculation that the Federal Reserve will trail other central banks in increasing borrowing costs.

The US currency later pared its drop versus the euro and yen after a large order to buy the greenback, traders said.

In Europe, sterling plumbed six-month lows against the euro after inflation data cemented the view interest rates would stay near zero, with concern about the UK’s fiscal position also prompting traders to dump the pound.

The pound later rallied as Bank of England deputy governor Charles Bean said in a speech in London that economic “activity here and elsewhere has probably troughed” and policy makers “need gradually to remove the large monetary stimulus”.

He said the bank’s plan to buy £175 billion of bonds may be working as financial asset prices increased and confidence recovered.

The pound gained 0.6 per cent to $1.5890 and appreciated 0.2 per cent to 93.30 pence to the euro after the comment.

The UK’s inflation rate dropped in September to the lowest level in five years, dampening speculation the Bank of England will raise its main rate from a record low of 0.5 per cent any time soon.

Consumer prices rose 1.1 per cent from a year earlier, compared with 1.6 per cent in the previous month, the Office for National Statistics said yesterday in London.

Sterling is down nearly 3 per cent against the euro and more than 2 per cent on a trade-weighted basis this month and market positioning data shows speculators making big bets on a further fall in the pound.

UBS cut its forecast for sterling yesterday, citing the likelihood policy makers will expand asset purchases. The world’s second-largest currency trader expects it to trade at 94p to the euro in one month, compared with 89 pence in a prior estimate. Sterling will probably weaken to $1.54 in the same period, compared with a previous estimate of $1.63, UBS said.

The pound’s weakness has caused knock-on effects for Irish businesses. On RTÉ Radio yesterday, the Irish Exporters Association said sterling’s fall was “catastrophic” for Irish firms.

“It is the worst period in living memory for the vast majority of Irish indigenous exporters,” said association chief executive John Whelan.

“It is one of these periods where businesses are finding it extremely difficult to stay trading and find the logic of trying to make any money out of sales into the UK almost impossible to square.”

He called for new stimulus measures to help support exporters, warning that the sector was facing “complete decimation”.

A perception that British authorities are not opposed to a weaker currency, which helps exporters, has added to sterling’s woes. BoE governor Mervyn King said last month a weak pound was helping to rebalance the UK economy.

The dollar trimmed its losses against the euro in afternoon trading after “one large buy order”, said Shaun Osborne, chief currency strategist at TD Securities. – Bloomberg/Reuters