Interest Rate Story Hurts Pound

The British Pound has been reeling since the Bank of England cut rates at the beginning of this month, from 5.75% to 5.50%. Last week, the minutes for the meeting were released. They revealed that that members of the Bank were growing increasingly nervous about the state of the British economy and are worrying particularly about how fallout from the credit crunch will impact growth. British interest rates are still among the highest in the industrialized world, behind only Australia and New Zealand. Thus, it seems investors are punishing the Pound indirectly for the rate cuts, because of fears concerning the near-term prognosis for the British economy. At the same time, the minutes indicated that members of the Bank were adamant about not lowering rates further, so some of the concerns may be overblown.

Interest Rate Story Hurts Pound

The British Pound has been reeling since the Bank of England cut rates at the beginning of this month, from 5.75% to 5.50%. Last week, the minutes for the meeting were released. They revealed that that members of the Bank were growing increasingly nervous about the state of the British economy and are worrying particularly about how fallout from the credit crunch will impact growth. British interest rates are still among the highest in the industrialized world, behind only Australia and New Zealand. Thus, it seems investors are punishing the Pound indirectly for the rate cuts, because of fears concerning the near-term prognosis for the British economy. At the same time, the minutes indicated that members of the Bank were adamant about not lowering rates further, so some of the concerns may be overblown.

Dollar Declines in Forex Reserves

What analysts have been warning of for years has finally come to pass: the USD officially occupies a smaller portion of global foreign exchange reserves. According to a recent IMF reports, the fraction of reserves denominated in Dollars has fallen from 66.5% to 63.8% over the last year, with much of the difference offset by a proportional rise in the preponderance of the Euro. Analysts first began sounding alarm bells as early as 2003, when the Dollar fell nearly 15% against the Euro. However, it wasn't until 2006, when China began to accumulate reserves at an ever-increasing rate as its trade surplus exploded while at the same time the USD was tanking, that commentators began paying attention. 2007 brought several anecdotal reports that foreign Central Banks were both passively and actively diversifying their reserves. Now, it looks as though these were not isolated incidents, but instead part of a broader trend. AFP reports:

In recent months, several emerging-market countries, whose foreign currency reserves have ballooned as a result of such factors as high commodity prices and strong exports, have signaled their intention to further diversify their foreign exchange reserves to offset the US currency's depreciation.