UK Pound Appreciates as Inflation is Closely Monitored

Posted January 27, 2010

The UK pound rose against the euro and the US dollar as policymakers monitor inflation. The US Federal Reserve kept benchmark interest rates unchanged and the dollar strengthened against the euro. The Brazilian real fell against the US dollar. Latin American currencies weakened broadly. The Canadian dollar weakened again as oil prices declined further.


The UK pound strengthened against both the US dollar and the euro as the specter of interest rate increases appear. The Bank of England has noted that it is monitoring inflation as the December rate increased by a full percentage point. The unknown at this point is whether inflation is here to stay or if the December inflation increase was an anomaly.

The pound rose against the euro to 86.73 pence per euro. It also rose against the US dollar to $1.6183.

The US Federal Reserve policymakers met on Wednesday and voted to keep benchmark interest rates at zero to .25 percent as expected.  The economy remains very weak and there are real and growing concerns as to whether the US economy will even be able to resume steady expansion this year. With rising unemployment, tight credit markets, and millions of foreclosures expected in 2010, it is no surprise that most analysts expect the US dollar to continue weakening.

But it is important to note that a Federal Reserve Board member, Thomas Hoenig, made it clear he dissented with board members over when the benchmark interest rates should be increased. The Feds had already stated that rates will remain low for an extended period of time and Hoenig disagreed with the “extended period” concept.  As the US government considers withdrawing the mortgage backed securities purchase program, Hoenig might be right that “financial conditions had change sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period” may not be justified.

The US dollar rose against the euro to $1.4023. The dollar strength was attributed to the fact that Federal Reserve board members were not in complete agreement as to the condition of the economy. When one dissenter like Hoenig tells the market that economic conditions are changing, it is possible other Reserve members may no longer be as firm in their opinions.

The Brazilian real fell to 1.8698 reais per US dollar. The real has lost 6.1 percent of its exchange value in January so far and the decline is expected to continue. Investors have been returning to safe haven investments as the news of the global recovery indicates it continues to struggle.

Brazil’s central bank voted to keep the interest rate at 8.75 percent. The bank policymakers also made it clear that rates could rise soon.

The Chile peso has weakened as investors abandoned the currency after changes were made to pension fund rules. The full impact of the new rules remains in question making investors nervous. The peso declined to 522.25 peso per US dollar.

Other Latin American currencies fell also. The Argentinean peso fell to 3.816 pesos per US dollar. The Venezuelan bolivar weakened to 69.23 bolivars per US dollar. The Columbian peso also fell against the dollar to 1,988.5 pesos per dollar.

The Mexican peso fell to 12.972 pesos per US dollar.

The Canadian dollar weakened to C$1.0643 where one Canadian dollar purchases 93.96 US cents. Crude oil prices continued to fall and were at $73.71 per barrel for March future delivery. The loonie is also responding to concerns about the pace of the global economic recovery.

The South African rand weakened to 7.6148 rand per US dollar. The central bank decided to keep the benchmark interest rate at 7 percent, but like the discussion at the US Federal Reserve, not all bank members were in agreement.

The Romanian leu rose against the euro to 4.1118 leu per euro. The International Monetary Fund has agreed to release a 2.3 billion euro loan to Romania.

The Polish zloty fell to 4.0968 zlotys per euro.