Speculation that the Bank of England will raise interest rates and a continued weak U.S. housing market have allowed the British pound the highest gain against the U.S. dollar in 26 years. The pound rose to 2.0330 U.S. dollars by 1:53 p.m. today in London. This marks a 3.5 percent gain this year alone. Sean Callow, a senior currency strategist at Westpac Banking Corp. in Singapore, states that the pound is an attractive yielder if you want to play a weak dollar.
Last week the Bank of England raised its federal fund rate for the 5th time this year to 5.75 percent. This monetary decision was taken amid worries of continued inflation, which has been 2.00 percent above the target level this year. Investors are speculating that the British central bank will continue to raise interest rates. Futures trading on interest rates have shown that investors are expecting a quarter point increase by the end of the year. Higher interest rates correlate with a stronger value of the domestic currency relative to others.
The other factor affecting the high gain by the pound is the continuing weak U.S. housing market. Yesterday, Standard and Poor’s Rating Services put 612 securities backed by subprime mortgages on “CreditWatch negativeâ€, due to their high delinquency and foreclosure rates. On the other hand, Moody’s Investor Services cut ratings on $5.2 billion of bonds backed by U.S. subprime mortgages. The rating agency downgraded 399 securities and an additional 32 will also be likely downgraded following review. The S&P expects these loans to borrowers with poor credit histories to continue to lose money.
The majority of the loans affected by the downgrade in ratings are held in portfolios by major Wall Street firms Bear Stearns, Citigroup, JP Morgan, Merrill Lynch, and Morgan Stanley. Standard and Poor’s has indicated that the 2006 subprime loans have accumulated delinquencies to an unprecedented level at much higher rates than initially anticipated. Continued falling house prices and increasing interest rates on many subprime adjustable rate mortgage loans will make it even more difficult for subprime borrowers to pay back loans. The U.S. housing slump seems to be far from over. This means a weaker U.S. dollar and a potentially higher pound in the long run.
Posted: July 11th, 2007 under General.
Comments: none
Our monthly reports tell you what countries and currencies offer the best deals. Travel and buy smart!