Sunday 27 September 1998
"The focus will be entirely on the Fed," said Steve Andrew, an economist at Merrill Lynch, who said he expects the Fed to ease rates by a quarter point at its 29 September meeting. "Sterling is going to remain attractive."
On Friday, the pound rose against the dollar to $1.6993 and advanced against the German mark to DM2.8431.
Speculation the US would lower rates grew last week on news that the Fed organized a bailout of a troubled US hedge fund. Concern that other funds may be facing similar problems may help push the Fed into cutting rates, traders said.
Fed Chairman Alan Greenspan fanned expectations for a cut in the federal funds rate, now 5.5 per cent, when he told the Senate Budget Committee last week that "deteriorating foreign economies" are likely to slow US growth enough to contain inflation.
While lower rates usually stimulate economic growth, they often weaken a currency by lowering money-market returns.
Mr Andrew expects the Bank of England to match a cut by the Fed, though not until later in the year. That could weaken the pound slightly in the coming months to about $1.60 per pound, Mr Andrew said, though rates will hold well above those in the US The Bank of England left its benchmark securities repurchase rate untouched at 7.5 per cent at its last meeting.
The return on three-month sterling deposits is 7.39 per cent while dollar deposits bring a 5.31 per cent return.
"The bank will probably be too cautious this year" and will wait to lower rates, said Simon Rubinsohn, manager at Capel-Cure Myers Capital Management and sees the pound rising in the short-term. "We expect to see only one rate cut this year, but rates will fall sharply next year" to 5.50 per cent or below by the end of next year.
The pound's rise could be curbed by a UK trade report to be released on Monday, which will likely show a further widening of the trade deficit. Economists expect that the August trade deficit with nations outside the European Union widened to pounds 1.1bn from pounds 949m.
The overall trade deficit was likely little changed in July from pounds 1.437bn in June. In the second quarter, the deficit was 5 per cent bigger than in the first three months of the year as the strength of the pound makes UK products more expensive abroad.
The pound is up 23 per cent against the currencies of its major trading partners since August 1996.
Mr Rubinsohn said he sees sterling rising to DM2.88 or DM2.90 this year, before falling to 2.65 next year. "We're cautious about sterling, but we don't think it's time for it to fall quite yet," he said. "If sterling were to recover, we would be looking to sell into that."
The UK reported last week that retail prices minus mortgage interest payments, the Government's preferred measure of inflation, rose 0.4 per cent in August, slowing the increase for the year to 2.5 per cent from 2.6 per cent in July. At 2.5 per cent, UK inflation is in line with the Government's annual target.
- 1 British tourists 'murdered' in Thailand: Pair's bloodied bodies found naked on Koh Tao beach
- 2 Vivienne Westwood says 'Yes' to Scottish Independence by declaring: 'I hate England'
- 3 Welcome to Cameroon, where drinking Baileys can lead to imprisonment
- 4 Lego breaks out of the toy box and heads for the gallery
- 5 Vogue under fire for 'Big Booty' article
British tourists 'murdered' in Thailand: Pair's bloodied bodies found naked on Koh Tao beach
Jihadi John': MI5 may have identified Isis militant who killed David Haines but options limited
Vivienne Westwood says 'Yes' to Scottish Independence by declaring: 'I hate England'
David Haines beheading: David Cameron says Britain will hunt down Isis 'monsters' shown in video murdering aid worker
Piers Morgan attempts to save the Union by promising to go back to the US if Scotland votes 'No' to independence
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
£23m Birmingham cycle scheme is attacked by Tory councillor for not catering to the elderly
Salmond accused of laughing off national debt with ‘what are they going to do: invade?’ joke
iJobs Money & Business
£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
£35000 - £38000 per annum + Benefits: Ashdown Group: Training Coordinator / Pl...
Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)
£400 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...