Daily currency report

A surprise meeting by the European Central Bank in which policy makers promised to “actively implement” bond buying along with a pledge of coordinated action by the G7 to ensure stability and liquidity in financial markets, has helped limit the fallout from the historic US downgrade. Standard & Poor’s downgrading of America’s credit rating from the top-tier AAA to AA+ compounded market jitters over the dubious state of the worldwide recovery and saw the safe haven Swissie once again hitting record highs against the ailing dollar.

Sterling

The pound showed little reaction to data showing a big rise in UK wholesale prices. The figures did nothing to change the view that the Bank of England may hold off from raising interest rates until well into 2012 at the earliest. Some analysts even expect the Bank of England to ease monetary policy further by resorting to more quantitative easing.

US dollar

The S&P downgrade means that effectively US government borrowing becomes more expensive and in return the US will find it more difficult to finance their huge deficit. At least short term this move is likely to prove a psychological blow to already fragile markets that are buckling under the pressure of the ongoing impact of the eurozone debt crisis. The buck has handed substantial gains to all other currencies on the back of the downgrade. Investors will now look to the Federal Reserve meeting for hints of further easing as worries about the global economy grow.

Euro

The euro has managed to muster some healthy gains against the dollar following a surprise meeting by the European Central Bank in which the Central Bank agreed to “actively implement” its controversial policy of bond buying to ease pressure on Italy and fight the eurozone’s debt crisis. The Central bank’s decision came hot on the heels of Berlusconi’s pledge to speed up austerity measures and social reforms in return for European Central Bank help with funding.

Japanese yen

Yen gains versus the dollar have ensured continued vigilance in the market following on from overnight comments by the Japanese Finance Minister that signalled a readiness to continue selling the currency. Japan sold 4.6 trillion yen in the market last week, however, worries about a global economic slowdown, have led analysts to question the effectiveness of such actions by central banks in sparking a trend reversal in current yen and other safe-haven currency strength.

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