Morning Foreign Exchange Report : Stock Markets Continue to Fall, but US Dollar Weakens

Modified: Thursday, 24 February 2011 09:20 BST - Written by John Cameron

STORY LINK Morning Foreign Exchange Report : Stock Markets Continue to Fall, but US Dollar Weakens

With Libyan authorities continuing to use violence to suppress pro-democracy demonstrators, an end to the insurgence in the Arab state looks to be some way off. The situation continues to drive wholesale oil prices to new near-term highs, with analysts estimating that unrest in Libya has caused a loss of production of around one million barrels per day. The price of Brent Crude broke to a new 30-month high earlier today, rising to almost $113 per barrel during Asian trading.

Fears over future oil supplies and a possible escalation of the Arab uprising to key OPEC producers has caused global appetite for risk to fall further since yesterday’s European opening, with the FTSE 100 losing over 1% on the day yesterday. European equities markets lost a similar amount, whilst in New York, the Dow Jones was down by 0.88%. The benchmark Nikkei 225 in Tokyo lost almost half a per cent last night, but the Hang Seng in Hong Kong provided some grounds for optimism, remaining almost unchanged on the day. Futures markets predict that the S&P 500 will enjoy its first positive session since last week today, raising hopes that the plummet in appetite for risk is nearing a temporary end, at least until there are further developments in North Africa and the Middle East.

The current trend for the US Dollar is providing concern for investors holding Dollar-denominated assets. Ordinarily, analysts would expect the Dollar to make significant gains when risk aversion peaks, due to the Dollar’s role as the market’s safe haven currency of choice. However, the Dollar has lost ground against the other majors during recent sessions, whilst other reserve currencies, including the Swiss Franc and the Japanese Yen, have made gains. The reason behind Dollar losses would appear to lie in its status as the world’s leading net importer of oil. The spike in wholesale oil prices hurts the US relatively more than any other nation. The Federal Reserve’s continuing reluctance to consider a tightening of US monetary policy also weighs heavily on the Dollar, particularly as rising oil prices mean that central banks that are minded to increase interest rates may be forced into acting sooner rather than later due to escalating input costs driving prices higher.

Interest rate expectations continue to determine the relative strengths of Sterling and the Euro. The minutes of this month’s Bank of England MPC meeting , released yesterday, revealed that only one additional member of the nine-man committee joined known hawks Sentance and Weale in voting for a rate hike. The minutes showed that the six members who did not vote to raise rates would be closely watching tomorrow’s quarter 4, 2010 UK GDP figure for any upward revision from the current estimated -0.5% level. An upping of the number would make them more likely to vote for a raise at March’s meeting.

Meanwhile, in the Europe, ECB President Jean-Claude Trichet commented yesterday that ‘policy-makers will take the decisions necessary to maintain price stability’ in the Eurozone. This is the latest in a line of hawkish comments by ECB members which has led futures markets to predict that the European Central Bank will raise rates by more then the Bank of England or the Federal Reserve over the next 12 months. The Euro gained further support yesterday when German officials suggested that they would consider supporting plans to grant increased powers to the European Financial Stability Fund in order to allow it to provide further support for European nation states suffering difficulties in servicing their sovereign debts.

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