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Foreign Exchange Rates : GBP/USD Rate Trades Higher

February 28, 2011 - Written by John Cameron

The Dollar has had a losing start to the week and is currently trading down by over 0.5% on the day against both the Pound Sterling and the Euro.

Events in Libya look to be moving towards a conclusion, with anti-government forces gaining control of increasing swathes of the country and the international community calling for Colonel Gaddaffi to step down. This has caused some stabilisation in global equities markets in the last two sessions, following the heavy losses sustained up to Thursday of last week. The benchmark S&P 500 index gained over 1% on Friday and futures markets predict that it will trade broadly level today.

Meanwhile, oil prices continue to rise, with Brent crude gaining by over 2% already today on fears that the Arab crisis will spread to the world’s number one oil producer, Saudi Arabia. Unfortunately for investors holding US Dollar-denominated assets, it seems that the US Dollar’s role as a safe-haven currency appears to be weakening, so any dip in global appetite for risk may serve to benefit the Yen and Swiss Franc, rather than the Dollar.

Question marks over the Dollar’s role as a reserve currency come from fears over the structural strength of the US economy. Massive levels of government debt and an ongoing commitment by the Federal Reserve to pursuing its current asset purchase scheme have made the Dollar a less attractive option during flights to safety.

Meanwhile, latest figures show that the US economy consumes twice as much crude oil as any other nation, putting it in a vulnerable position if crude oil continues to appreciate. A test of the 1.4000 level on EUR/USD, last seen in November 2010, looks possible if current trading conditions persist.

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