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FX round-up: Rate cut hopes hit sterling

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Date: Thursday 20 Mar 2008

LONDON (ShareCast) - Sterling was under the cosh Wednesday as hopes of an early interest rate cut were raised by publication of the minutes of the last meeting of the Monetary Policy Committee. Perennial dove David Blanchflower was joined by Deputy Governor John Gieve, responsible for financial stability, in pressing for an interest rate cut.

Sentiment was also hit by rumours of a major UK financial institution suffering liquidity problems, with mortgage lender HBOS widely nominated as the most likely candidate. Although HBOS strenuously denied the rumours and the Bank of England moved to quash reports that Easter holiday leave had been cancelled for members of the Monetary Policy Committee so that they could discuss emergency funding for the mortgage lender, the markets remained nervous.

Meanwhile, average earnings increased at an annual rate of 3.7% in January, less than the 3.8% reported in December. Analysts expected no change. The lower than expected growth in wage costs may encourage the Bank of England to cut interest rates earlier than expected, with some observers predicting a cut next month.

In London trading the euro made headway against sterling to rise to 78.87p, not far short of its record high of 79.12p posted on Monday of this week, while the UK currency dipped to $1.9842 against the greenback, having started the day just shy of $2.

In New York trading the dollar gained against the euro and sterling in the wake of yesterday’s lower than expected US interest rate cut. The US currency lost ground, however, against the Japanese yen.

Expectations persisted that the Fed stopped short of cutting rates by a full point for the purpose of feeding through another cut, of a quarter of a point, next month.

The euro took a hit from euro zone trade figures which showed the trade deficit in January widening to €10.7bn from €4.1bn, suggesting that the currency’s strength is beginning to have an impact on the region’s export performance.

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