Foreign Exchange: Pounds Falls Heavily Against US Dollar And Euro

The Pound fell to the lowest level against the US Dollar for a month and it also lost over 1% against the Euro. This weakening of the Pound followed a report from Rightmove Plc showing that UK house prices declined by the most in a year.

With concern that the UK economic outlook is deteriorating, home sellers cut asking prices with these cuts being at the highest level for almost four years. The average asking prices were down 3.1% in November compared witht he previous month. This fall in prices was coupled with a 13% fall in the number putting their houses on the market.

The Prime Minister David Cameron admitted that Britain is “well behind” in terms of growth and reiterated concerns over the UK’s exposure to the European sovereign debt crisis. The FTSE 100 Index dropped for a sixth consecutive day, which is feeding into risk aversion and boosting the appeal of the safest assets like the US Dollar and Yen.

The disappointing housing figures have brought the focus back on the weakness of the UK economy today and the Pound is losing value as a result.

The Pound dropped to the lowest level since October 12 versus the Dollar at 1.5610, losing over 1% on the day.

The Bank of England governor Mervyn King said last week in the quarterly inflation report that the UK economy faces a “markedly” weaker outlook and there is a persistent threat from the Euro-zone. King also said that growth is likely to be “broadly flat” in the first half of 2012 and the MPC is expected to maintain a pessimistic tone in the minutes from this month’s policy meeting.

There is a persistent lack of confidence in the UK economic outlook following a raft of negative data on business confidence and report of weakening consumer spending in the build up to Christmas.

The Pound has enjoyed its position outside the Euro-zone and has been the beneficiary of safe haven capital flows over the past few weeks, as confidence drained from the Euro-zone. There were increased concerns that flows may decline at current yield levels, especially given the medium-term fears over the UK economic outlook.

The Pound was also generally more vulnerable when risk aversion increased and this was an important feature during Monday, as equity markets were subjected to heavy selling pressure. A large weighting of mining stocks in the UK FTSE index compounded the impact. The Pound may be susceptible to further selling pressure today with the Bank of England minutes due for release this morning.

Euro/US Dollar

The Dollar and the Yen rose against the majority of the majors yesterday, as a flight to safety ensued, amid speculation that US officials will fail to agree on a deficit reduction plan, resulting in a second credit rating downgrade for the world’s largest economy. Congress’s budget supercommittee said last night that it had failed to reach an agreement on cutting the deficit.

The Euro was trading close to the lowest level against the Dollar in six weeks but recovered through the course of the day, amid suggestions that the single currency was looking oversold in the region of 1.34.

The political and economic turmoil in Europe continued, as Spain’s Socialists became the fifth European government to be ejected as a direct result to the region’s debt crisis.

The Australian Dollar weakened to the lowest level in six weeks against the Dollar and may weaken further as stocks tumble worldwide and reduce appetite for risk.

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