Will Brown allow his puppets on the Bank of England's MPC to raise interest rates in order to combat a run on the pound or will he allow sterling to sink ? ...........................
The Times March 27, 2006
US rate rise may spark sterling sell-off
By Gary Duncan, Economics Editor
CURRENCY markets are steeling themselves for a threatened fall in the pound's value against the dollar this week after warnings that a rare rise in American interest rates above Britain's could trigger a sell-off in sterling.
Tomorrow, the US Federal Reserve, under Ben Bernanke, its new Chairman, is set to order a fifteenth consecutive quarter-point increase in American interest rates, lifting these to 4.75 per cent, which is higher than the 4.5 per cent level of base rates in Britain.
Periods when American rates have exceeded those in Britain have been infrequent during the past three decades. However, research by institutions such as HSBC highlights how these moves have almost always tended to send the pound sharply lower against the dollar.
Since the Bank of England cut borrowing costs last summer, foreign exchange markets have expected the Fed to push American rates above Britain's at some point this year. HSBC believes, however, that the event this week will leave risks to the pound's dollar value "heavily skewed to the downside".
One key factor is the effect of the latest Fed rate rise, as well as expectations of at least one more increase to come, on so-called "carry trades", where investors borrow in countries with lower rates to secure bigger returns by placing funds in those with higher rates. HSBC believes that the increase in official American rates tomorrow will oust the pound from its status in carry trade investors' baskets of highyielding currencies in favour of the dollar, leading to a wave of selling of sterling.
It also believes that a sell-off will be fuelled by £3,000 billion of footloose "hot money" invested in Britain through short-term deposits. A large part of these holdings could be vulnerable to being rapidly pulled out of Britain once potential returns in the United States rise further.