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Foreign Exchange Rates : GBP/USD Rate Pulls Back as Stock Markets Fall

March 2, 2011 - Written by John Cameron

Asian stock markets suffered heavy losses overnight, with Tokyo’s Nikkei closing 2.20% lower and Hong Kong’s Hang Seng currently trading down by almost 2%. These losses follow pronounced downward moves for the FTSE 100 and the S&P 500, which lost 0.97% and 1.57% respectively, on the day yesterday.

Fears persist in global markets that the Arab uprising might spread to Iran and Saudi Arabia, the world’s leading oil producer. Saudi Arabia‘s stock market lost 6.8% yesterday, at a time when crude oil prices remain close to a 30 month high, showing that confidence in Middle Eastern political stability is ebbing. The closely-watched $VIX index rose 2.66 points to 21.01 yesterday, showing that increasing numbers of institutional investors are placing protective ‘puts’ in place when they purchase equities. The $VIX reading is used by analysts as a measure of ‘fear’ in the markets and a spike in its level signals a dip in the appetite for risk in the markets.

Meanwhile, in the States, US Federal Reserve chairman Ben Bernanke appeared in front of the Senate Banking Committee yesterday, and answered questions regarding the effect that the recent rise in oil prices will have on the real economy in the states. He warned that sustained rises in the price of oil would represent a threat to both economic growth and price stability. These comments regarding the future prospects of the world’s leading economy added to the increasing mood of risk aversion in global markets and helped the US Dollar to pull back from its 13-month low against Sterling to trade down to 1.6215 earlier today.

The beleaguered Kiwi Dollar lost further ground during today’s Asian session as Prime Minister, John Key, stated that the New Zealand government would ‘welcome’ a cut in the domestic central bank lending rate. The Reserve Bank of New Zealand meet to set rates on 10th March and it was be a major surprise if they chose not to raise rates.

Elsewhere, Mervyn King, the Governor of the Bank of England, commented to the UK Parliamentary Treasury committee yesterday that the Bank’s nine-man MPC were convinced that UK inflation would fall. The characteristically dovish tone of King’s comments will have done little to convince the markets that a UK interest rate hike is coming any time soon, placing downward pressure on the Pound.

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