The announcement late yesterday that Larry Summers has withdrawn from the race to be the new head of the US central bank caused much volatility in the markets in Asia with equity futures surging and the US dollar tumbling against a number of currencies. Larry Summers was amongst the front-runners to succeed Ben Bernanke as head of the Federal Reserve. News of his withdrawal pushed the US dollar sharply weaker and is now close to the psychological 1.60 USD level – almost unthinkable just two months ago.
When Mark Carney became the Governor of the Bank of England in July, Sterling was hovering below 1.50 USD and it was widely thought that his arrival would act as a catalyst in driving Sterling sharply lower with many analysts predicting that Sterling would in fact fall to 1.40 USD. Mark Carney had said that he wanted the UK economy to become more export oriented and therefore weakness in Sterling was likely to occur. However, two months later Sterling is above 1.595 USD and > 15 per cent above 1.40 USD.
After years of lagging behind most of the world’s major economies, economic data recently published shows the UK, for now, is a world-beater .The UK economy has shown better than expected strength recently with GDP figures 0.6% for the second quarter versus expectations of 0.3%.The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) jumped to 57.2 last month from 54.8 in July, its fifth straight month of expansion and a two-and-a-half-year high. Perhaps this is why Sterling has been in demand against the US dollar.
The recent strength in Sterling has surprised many, including myself but Sterling seems to have factored in a lot of good news with the rate touching distance of the 1.60 USD level and leaves very little room for disappointment. From a purchasing power point of view, Sterling seems very toppy when comparing the price of goods and services with the U.S.
There is still the possibility of an attack on Syria by the U.S and its allies as well as general geo-political risk in the Middle East. The U.S currency is seen as a safe haven and buying will be ferocious if there is gunfire from the U.S. It is hard to predict the future and always expect the unexpected, things can change and reverse very quickly and the US dollar is no exception.
Further reading: QE Tapering Preview: 5 Reasons, 6 Scenarios and 7 Potential Currency Reactions
Share
