Sterling weakens after US inflation warning

Jun 4 2008 by Tony McDonough, Liverpool Daily Post

VOLATILE trading in the money markets saw under-pressure sterling fall against the dollar yesterday.

Sterling weakened after a rare warning about the inflationary risks posed by a weak dollar from US Federal Reserve chairman Ben Bernanke.

The comments, which caused the dollar to jump broadly, proved too much for the pound, already vulnerable after a pummelling on Monday due to bleak UK economic data and banking sector jitters.

The pound fell to a two-week low on Monday after Bradford and Bingley – Britain’s largest buy-to-let mortgage lender – issued a stark profit warning, restructured its rights issue and announced the resignation of its chief executive.

A run of UK data also contributed to the problems. Deterioration in construction activity added to weak mortgage and manufacturing figures released on Monday. Ratings agency Fitch also said pressure points were continuing to build for UK banks.

Mr Bernanke said the Fed and the US Treasury were continuing to “carefully monitor” developments in currency markets – in a surprising move as the Fed doesn’t normally comment on the dollar.

“Normally, the Fed does not speak about the dollar, so this is quite unusual,” said Robert Bergquist, chief analyst at SEB in Stockholm.

“The market is interpreting this as meaning the US doesn’t like the weakening of the US dollar,” he added. By mid-afternoon yesterday, sterling had fallen from session highs above $1.97 to $1.9605, down 0.3% on the day and nearing Monday’s two-week trough of $1.9594.

The dollar’s broad sweep higher turned the euro’s gains against sterling to a loss, with the single currency falling 0.4% on the day to 78.67p.

Analysts said general domestic sentiment remained depressed as data continued to paint a poor UK economic picture, while banking sector difficulties were far from over.

Britain’s economy is currently caught between slowing growth and rising price pressures, while consumers are feeling the pinch of a now 10-month old credit crunch.

No imminent relief is seen on the policy front, as the Bank of England is set to keep interest rates at 5% this week.

The slowing economic picture was highlighted by data showing British construction activity dropped last month at its sharpest pace in at least a decade as falling house prices and tight credit took their toll.

The Chartered Institute of Purchasing and Supply’s construction PMI fell to 43.9 in May from 46.1 in April.

That was the third consecutive month of decline and weakest reading since the survey began in 1997.

Any reading below 50 signals contraction.

“This wave of weakness in terms of the data is likely to continue for the time being,” said David Woo, head of currency research at Barclays Capital.

Service sector data due today is expected to show near stagnation, with the activity index forecast to stay at 50.4 in May.

tonymcdonough