大象传媒

Why is this not entered as a comment to yesterdays topic, I wonder? Could it be to help push the previous topic "Good News on Inflation" off the list of entries? Out of sight, out of mind? ;)

After reading around the internet I predicted that, after todays BoE interest rise, the pound would strengthen against the US dollar.
This was based on the idea that in the short term the exchange rates are controlled by the interest rates. But, as i write, the pound seems to be getting weaker against the dollar. Can anyone explain?

Paul
I believe it is because the currency dealers would have factored in this rate rise a while back. Therefore, as the inflation report came out a few weeks ago, with inflation at 3.1%, the pound jumped then as the traders new interest rates were likely to rise. It may have fallen against the dollar as the currency traders thought there was a chance of a 0.5% rise.
Hope this helps!
Best wishes, Andy

Interest rate changes clearly don't effect consumers pockets overnight. It takes time for payments on debt to become unmanageable and affect spending. Is anyone else concerned that the lagged effects of increasing the rate of borrowing haven't fully played themselves through yet ? As I had the bad fortune to choose a variable rate mortgage last August, I'm not relishing the prospect of further rate increases, especially when inflation seems to be heading in a downward direction already.

Paul, the foreign exchange markets move with changes in expectations rather than what is actually happening.

Can some one explain me why last time the interest rate went up from 5% to 5.25% the pound became stronger against the dollar?

And this time when American interest rates are same, economy talking a down turn, where even walmart is giving profit warnings. Then why did the pound not rise? Even though pound would be more favourable in terms of interest rate and the economic forecast.

Deepak,

It looks like markets had already factored in a 25bp rise. In addition, a minority in the market had bet on a 50bp rise, and so as the decision came through, markets fell back slightly.

The basis of currency valuation is interest rate parity - ie: the values set rflect hte relative rate positions. Consequently if UK rates go up, then next year, you will have a bit more UKP (1.0525 rather than 1.05). That must able to buy more than the current USD equivalent, since that relates to the previous rate. Thus the USD must fall/UKP rise, so that next year, 拢1 buys more than the existing USD.

As is mentioned above, the markets actually run on expectations. They have already factored in a rise to 5.75% later this year. However, this will slow the UK economy and so, a selling off UKP is likely pushing the rate down (on the usual supply/demand basis).

The UK economy is about to tank - 5.5% is enough to stall the housing and credit markets.

An experienced insolvency of my acquaintance, who has seen the 80s and 90s, has described the current economic position as one of "suspended animation". Having worked through the manic insolvent scenario of the early 90s and expected a "normal" cyclical downturn for the last 18 months, I would appreciate fellow readers' observations as to why the economy remains apparently "healthy" as it seems to me that we are seriously living on borrowed time. Also, who put estate agents in charge of house prices??