Foreign Exchange Report : GBP USD Rate Hits Lowest Level For Over 12 Months as £64bn is Wiped Off the Value of London’s FTSE 100

23 Sep 2011 at 8 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : GBP USD Rate Hits Lowest Level For Over 12 Months as £64bn is Wiped Off the Value of London’s FTSE 100

The Pound Euro exchange rate (GBP EUR) is 1.1413. The Pound Dollar exchange rate (GBP USD) is 1.5436. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5735.

The flight to quality, which began in the early part of this trading week, continued at pace during yesterday’s session in the markets, as global investors continued to shift out of higher-yielding assets, perceived to be riskier bets and into safe havens.

This drop-off in appetite for risk was evidenced by movements in major global stock indices. London’s FTSE 100 index registered its largest daily fall since November 2008, just after the demise of leading investment bank Lehman Brothers, to close down by 4.7%. In total £64bn was wiped off the FTSE’s value. Frankfurt’s Dax index and Paris’s Cac 40 suffered even larger percentage losses on the session.

The global asset sell-off caused a move into safe-haven assets by institutional investors during yesterday’s session, causing demand for US treasury bills to rise to levels not seen since the 1940’s, causing the GBP USD exchange rate to dip to 1.5327, its lowest level in over 12 months, on the day.

The sharp drop in risk appetite was caused by fears that the global economy is sliding inexorably towards a double dip recession. These concerns have been fuelled by a series of growth downgrades by global central banks and institutions including the IMF over the past ten days. The markets were already in a febrile state before these downgrades, due to worries over the potential effects that contagion from the Eurozone’s sovereign debt crisis might have on the global commercial banking sector.

Sentiment rapidly deteriorated in the last 48 hours as economic data releases appeared to re-enforce investors’ fears that a global slowdown is on its way. Yesterday’s Markit PMI survey showed that Eurozone economic activity contracted for the first time since 2009 last month, suggesting that Europe’s tentative recovery is over. Other data showed that Eurozone factory output shrank for the second month in succession in August and that business activity in Germany, traditionally the Eurozone’s powerhouse economy, showed its lowest level of growth since 2009. Weak Chinese economic data releases last night added to investors‘ perception that the global economic picture is deteriorating.

Comments by policy-makers over the past 24-hours have exacerbated the prevailing mood of gloom, with the President of the World Bank, Robert Zoellick, asserting that the world’s economy was in a ’danger zone’. The head of the IMF, Christine Lagarde, echoed this sentiment, stating that the world was in a ‘dangerous place‘.

The evaporation of appetite for risk saw market-participants turn against the higher-yielding currencies, with the GBP AUD, GBP NZD and GBP ZAR rates all showing pronounced gains - the GBP AUD rate has now convincingly rejected its near-term low of 1.4987 to touch 1.5825 overnight. More gains are likely for these pairs later today if UK and European stock markets follow the lead of Asian markets last night and give up further ground.


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