Currency Update

The US Dollar has continued to appreciate following last night’s unexpected announcement by the Federal Reserve to increase its Discount Rate by 0.25% to 0.75%. The Discount Rate is the rate US banks are charged at to borrow emergency funding from the Federal Reserve. The Target Rate that banks usually borrow at remains on hold at 0-0.25%. The move whilst largely symbolic, confirms that the Fed is starting to realise its exit strategy towards a return to more ‘traditional’ monetary policy. However, it is expected that the Fed may not tighten official monetary policy until the autumn.  Nonetheless, the US Dollar has appreciated strongly, pushing GBPUSD below 1.54, whilst EURUSD trades around 1.35 on the interbank market.

In the UK, the Pound took a fresh blow following this morning’s disappointing retail sales and yesterday’s public sector net borrowing figures, which showed that the UK government had to borrow £4.3B in January, a month which usually posts a surplus. UK tax receipts dropped by 11.8% compared with January last year. 

The debate also continues regarding the suitable timing of any UK government spending cuts. In an open letter to the Financial Times more than 60 senior economists backed Chancellor Alistair Darling’s decision to delay any government spending cuts until 2011, fearing that any earlier cuts could force the UK back into recession. This was as a direct riposte to a letter sent last weekend to The Sunday Times by a group of 20 leading economists supporting the argument that more rapid action to tackle Britain’s deficit was needed and that fiscal tightening should start this year.