Daily currency report

Both the pound and the euro face the tough dilemma of balancing rising inflationary concerns with the need to cut interest rates, in a time of slowing economic growth. Elsewhere, the dollar was boosted by an unexpected rise in US retail sales while Swiss financial giant UBS announced losses of £2.02 billion which illustrates the fact the US housing market and ensuing credit turmoil is continuing to affect the banks.

GBP

Market news were dominated by the revelation of Bank of England's Governor admission that the UK may be on the verge of a recession. The quarterly inflation report revealed that they would certainly exceed the two per cent inflation benchmark, should rates be cut too quickly. The Bank certainly harbours the notion that inflation will eventually fall below the two per cent ceiling if interest rates are maintained at 5.25 per cent.

USD

The dollar rose to a one-month high against the yen in the wake of an unexpected rise in US retail sales last month which has dispelled some qualms that the US economy is contracting. Since September the Federal Reserve has slashed interest rates by 2.25 per cent to the current three per cent and investors argue that to some extent this has assisted in staving off recession.

EUR

Industrial output in the euro zone was much weaker in December, adding to evidence the economy is slowing and increasing pressure on the European Central Bank to cut interest rates.

JPY

The yen was boosted by the news that strong export demand and business investment saw Japan's economy grow at an annualised rate of 3.7 per cent in the last three months of last year, a figure that exceeded analyst's expectations of a 1.4 per cent rise.