Foreign Exchange Insight : Rumours of QE3 by the Federal Reserve Threaten USD While Uncertainty Over Libyan Crisis Send Gold to a New Record High

Published: Tuesday, 23 August 2011 06:49 BST - Written by John Cameron

STORY LINK Foreign Exchange Insight : Rumours of QE3 by the Federal Reserve Threaten USD While Uncertainty Over Libyan Crisis Send Gold to a New Record High

The Pound Euro exchange rate (GBP EUR) is 1.1458. The Pound Dollar exchange rate (GBP USD) is 1.6479. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5748.

The crisis in Libya looked to be close to reaching a conclusion when rebel forces swept into Libya’s capital Tripoli on Sunday, cheered on by hordes of jubilant citizens.

Investors viewed the movement towards a decisive outcome in Libya as a positive development for the global economic recovery, largely because prior to the current conflict, Libya was the twelfth largest oil exporter in the world, providing much of the crude output used by the key European market, because of its situation on the southern shores of the Mediterranean.

The positive reaction to developments in the troubled North African state have seen world equities markets register steady gains since they re-opened yesterday, with London’s FTSE 100 closing up by over 1% on the session yesterday and the Dow Jones and Hang Seng registering positive moves of a lesser degree. The gains were largely driven by gains by energy sector stocks.

Although the price of a barrel of Brent crude oil dropped to close to the $105 level just before yesterday morning’s European open, it later recovered and is currently trading near to $109 per barrel. This move has been fuelled by reports that Gaddafi loyalists are providing stern resistance to rebel forces in Tripoli and also by comments by analysts suggesting that even if there is a transition of power in Libya, the damage inflicted on the nation’s oil infrastructure will take some time to rectify.

Elsewhere, market rumours persist that US Federal Reserve Chairman Ben Bernanke will use his set piece speech at Friday’s global economic forum in Jackson Hole to reveal plans for the US’s third programme of Quantitative Easing. If Bernanke does go down this route, the US Dollar is likely to come under heavy selling pressure for the remainder of 2011.

Investors would ordinarily expect the mood of uncertainty in global markets to benefit the traditional reserve currencies, (USD, CHF, JPY). However, with the Swiss and Japanese authorities having stepped into the markets in the last month in order to actively weaken their respective currencies and with market participants wary of committing funds to the US Dollar ahead of a possible announcement on QE3, gold has seen sustained support. The precious metal, considered to be the ultimate safe haven, broke to a new record high of $1,911 per troy ounce during Asian trading. It appears that the only certainty in global markets at the moment is the high level of investor uncertainty.


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