Daily currency report

The FX markets took their lead from the continuing issues in credit markets and, as such, the biggest winners were the dollar and the yen.

GBP

The pound was the main loser as investors cut carry trade positions as the credit crunch in the market continued looming. The release of UK CPI will be watched keenly as the market is assuming there will be more downside from inflation, and if so the pound is likely to be sold off. A low inflation reading would mean that interest rates would stay unchanged at the next BOE meeting.

USD

The dollar continued to make significant gains in the FX markets as unwinding of carry trades and better than expected US July retail sales data saw investors buy the greenback. The resulting effect was that the dollar index was up 0.44 per cent, rebounding from a 15-year-low reached a week ago.

EUR

The euro reached a one-month low against the dollar after the ECB poured a further 47.67 billion into the banking system for a third straight day to soothe a market shaken by US subprime mortgage problems. The euro was sold off heavily as investors believe that the ECB will hold off raising interest rates at its next meeting in September in the face of such turbulent credit markets.

JPY

The BoJ drained a total of $13.6 billion from the banking system, reversing two days of fund injections as overnight call rates plummetted after global markets stabilised. This indicates that Japanese money markets remain far more stable than abroad with the unwinding of carry trades helping push the yen higher against all of the higher yielding currencies such as the sterling, the kiwi and AUD.