The Pound falls sharply as the BOE says it's ready to ease further

Sterling fell sharply on Wednesday after the Bank of England said it was ready to ease monetary policy further, including a willingness to take unconventional measures to bolster the ailing economy. BoE Governor Mervyn King said measures could include buying gilts. He said the central bank would discuss so-called "quantitative easing", or buying assets directly to boost the money supply, at its next rate-setting meeting and the key bank rate would not have to fall to zero in order to adopt such measures. "The BoE's Inflation Report and the accompanying press conference make it clear that further aggressive stimulus is in the offing," said James Knightley, economist at ING. The GBP/USD is currently trading at $1.4230 as of 8:30am, GMT.

The dollar and yen will strengthen in the next six months as skepticism about a U.S. plan to rescue the banking system increases demand for the currencies as a haven. Stocks fell yesterday, government bonds rallied and the dollar and yen appreciated even as Treasury Secretary Timothy Geithner pledged government financing for the bailout that may grow to as much as $2 trillion. Last month the International Monetary Fund cut its estimate for world economic growth this year to 0.5 percent. Investors are even more bullish on the yen, with the index measuring sentiment toward the Japanese currency rising to 68.79 from 64.54. The yen, which rallied against 177 currencies last year as the seizure in credit markets deepened, tends to outperform in times of turmoil as the country’s current-account surplus, the broadest measure of trade, attracts investors. The USD/JPY is currently trading at 89.90 as of 8:45am, GMT.

Robert Mundell, the Nobel Laureate whose research helped lay the foundation for the creation of the euro, said the U.S. and Europe should cooperate to prevent exchange-rate swings from worsening the global recession. The Federal Reserve and European Central Bank should peg their currencies to a range of between $1.20 and $1.40 per euro, and use that as a basis for establishing “a new world currency,” Mundell said in a speech at the Hong Kong Monetary Authority. He also said that Asia should look into creating a regional currency. “The soaring dollar and falling gold price were symptoms of a shortage of dollar liquidity,” said Mundell, who won the Nobel prize in 1999. “Had the Fed recognized this shortage and bought foreign exchange to prevent the appreciation, there would probably have been no financial crisis in the fall.” The EUR/USD is currently trading at $1.2840 as of 9:00am, GMT.

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