Euros to Pound
For a while at the beginning of September it looked as though Sterling could go a lot lower against the Euro. The Darling Dip that began at the end of August, sparked by the chancellor's downbeat appraisal of the UK economic outlook, took the Pound down as far as €1.22 but the selling ran out of steam. It did so principally because investors' attention was wrenched away from exchange rates by the unfolding drama on Wall Street.
Fannie Mae and Freddie Mac nationalised
On the principle that you don't fret about the dripping kitchen tap if the house is on fire, investors couldn't care less whether Sterling/Euro is €1.22 or €1.32 if the flames from US financial houses are going to engulf the world. It started quietly enough (or so it seems in retrospect) with the two Government-sponsored enterprises Fannie Mae and Freddie Mac. They were unable to maintain levels of borrowing sufficient to keep them in business. Washington judged the two mortgage giants sufficiently important to the US economy that it stepped in to nationalise them. At the time Treasury Secretary Henry Paulson insisted the firms were a special case and that government money would not be forthcoming for any more rescues. |
| All information is treated in strict
confidence (although it will be passed a specialist currency exchange
professional in order to provide you with details
of the best products and rates available). By submitting the form to us you are deemed to have
authorised any such disclosure. |
|
AIG nationalised
A week later Mr Paulson proved his point by allowing Lehman Brothers to go bust and forcing Merrill Lynch into the arms of Bank of America at a knock-down price. His robust stance collapsed only days later when he had to launch another nationalisation exercise, this time with the private sector insurer AIG. The scope and global reach of AIG's derivatives exposures, especially in the field of credit insurance, would have brought chaos to financial markets across the world had it been allowed to fail.
|
Troubled Asset Rescue Plan - TARP
By the end of that week Secretary Paulson had come up with a plan to save the US financial system by buying up the asset-backed securities that lay at the heart of the credit crunch problem. He spent the following week drumming up support for his rescue plan from sceptical members of congress. The Troubled Asset Rescue Program (TARP) went to the House of Representatives at the end of September for approval. It did not get it.
|
|
Equity markets tumble
The next 24 hours saw equity markets tumble. At the time of writing the bill was expected to get congressional approval direct from the Senate and had the widespread approval of central bankers and politicians. They are not convinced it will get that approval, not even that it will work as intended. But they do know that all markets - not just US markets - are depending on its existence. (See update below.)
|
Sterling's exchange rate comparison
It may seem strange, in a comment supposedly about Sterling's exchange rate against the Euro, to devote so much coverage to goings-on in Wall Street. But the situation in US financial markets has transfixed the world almost for the whole of September. Currencies have been left on the sidelines, except where events had a direct effect on them.
|
Investors keeping quiet
Sterling/Euro was left to get on with its own business and managed to keep a low profile. News of bank problems in Britain (HBOS and Bradford & Bingley) was matched by similar happenings in Euroland (Fortis and Dexia). Any investors with an axe to grind held back and stayed out of the firing line.
|
|
Financial markets to return to normal?
Once Congress has passed the TARP bill it is possible the FX market will return to something approaching normal. People cannot, after all, remain in a state of panic indefinitely. Eventually we will be back in a situation where investors make currency decision based on details such as economic growth, inflation and interest rates. But we are not at that point yet. (See update below.)
|
Buying euros
In the meantime, with exchange rates reacting almost randomly to big breaking news items, there is no logic for other than a hedged exchange rate position (Glossary of terms used in currency exchange). If you are in the process of buying a property in France and need to buy Euros, or any other foreign currency in the foreseeable future, buy half of them now for forward settlement. (Currency exchange options which save you money.)
Additional articles which may be of interest:
Advantages of using a currency broker or foreign exchange specialist
Currency Exchange - Buying Euros at the Best Rates - Your FAQs
Feedback on currency brokers or foreign exchange dealers
UPDATE: Since writing this article, the US government's TARP legislation has been passed. This occurred on Friday 5 October 2008.
|
About the author
The information in this article has been supplied by the currency broker Moneycorp. For further advice on currency exchange and money markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility. Make your money go further!
You can contact Moneycorp directly using the links below.
Want to save time and money? Open an account now with this link:
Or get one of the Moneycorp team to phone you (saving you the price of the call). Just click on the phone icon, type in your telephone number and someone will call you straight back...
|
|
|
