Sterling falls on huge HSBC losses and possible BOE cut on Thursday

Sterling fell against the dollar on Monday after Britain's HSBC bank launched a huge rights issue and sources said troubled U.S. insurer AIG had agreed a further government bailout. Dollar strength against the pound and other major currencies reflected concerns over the financial sector that saw the S&P 500 hit a 12-year closing low on Friday and the FTSE 100 share index FTSE fall over 3 percent on Monday. HSBC led the losers after unveiling a 12.5 billion pound rights issue as annual profits fell and bad debts soared in the United States. Investors were also focused on this week's Bank of England interest rate decision, with borrowing costs seen hitting a fresh record low. "People are a little but wary ahead of the BoE but generally there's downside risk in cable because there's a chance the dollar strengthens further...given the break in equities, which is looking fairly significant and that suggests more upside for the dollar," said Naeem Wahid, a currency strategist at Bank of Scotland Treasury Services. The GBP/USD is currently trading at $1.4130 as of 8:27am, GMT.

Early this morning the dollar and the yen weakened slightly after Australia’s central bank unexpectedly halted its most aggressive round of interest-rate cuts, boosting demand for higher-yielding assets. The U.S. and Japanese currencies also snapped two days of gains versus the euro as Asian shares pared losses and U.S. stock futures climbed, increasing confidence among investors to resume so-called carry trades.
Currencies of economies with higher relative interest rates, such as Australia, New Zealand, China and the Philippines, all strengthened.
Demand for the greenback waned after the World Bank said the worst of the global financial crisis has passed. “Investors have no alternative but to look abroad because their domestic rates aren’t high,” said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan’s fifth-largest bank. “Recently, some appear to be buying assets in Asia as the performance of those assets is relatively good.” The EUR/USD is currently trading at $1.2665 as of 8:35am, GMT.

A former Federal Reserve economist who made a name for himself telling his superiors they were wrong is now taking on European Central Bank President Jean Claude Trichet. Athanasios Orphanides, the governor of Cyprus’s central bank, was the first ECB official to argue in favor of zero interest rates, challenging Trichet’s position that cutting them so low would have “drawbacks” and should be avoided. Now, investors and economists are betting Orphanides, 46, is winning the argument as the euro region suffers its worst recession since World War II. The ECB “can’t stand on the sidelines and use some weird voodoo economics,” said Erik Nielson, chief European economist at Goldman Sachs Group Inc. in London. “Over time, the power of the right argument tends to win out over the wrong.”

Today's Economic Events