February currency review

TO DESCRIBE the FX market as muddled over the last few days would be to credit it with a wholly unjustified semblance of orderliness. Investors were confident, scared, optimistic, frightened and upbeat, in that order.

The euro's status as a safe-haven currency meant that it was sold, bought, sold, bought and sold again as investors' mood changed almost with their socks.

On Friday morning, after the Bank of Japan announced it was cutting its deposit rate to a negative -0.1%, the supposedly risky commodity-oriented currencies were in favour and the safe-havens were not.

For the euro against sterling the net result was a relatively modest half-cent loss after it had covered a two-cent range five times.

It did rather better against the US dollar, adding a net cent and a half, principally as a result of the growing suspicion that the Federal Reserve is not as keen to raise interest rates as it pretends to be.

The Federal Reserve's decision to keep the target for its Funds rate unchanged at 0.25-0.5% was not a surprise and had no great effect on the dollar.

However, the more investors thought about it, the more they began to suspect that the prospect of four more increases this year was out of the window.

As that prop crumbled, so did support for the dollar. It lost a net cent and a half to sterling on the week and three quarters of a cent to the euro.

It was all change again in the FX markets on Wednesday. There was some terrific economic advice in the Daily Mail.

Apparently there is no need to spend £1,190 on a "Chloe Faye" handbag: you can save £1,155 by buying something similar from Marks and Spencer. Investors made a similar discovery about the dollar yesterday.

They found out that there was no need to spend £0.695 on a US dollar: they could save a penny (or, as the BBC would say, one pence) by buying an identical item for £0.685.

When London opened on Wednesday morning Cable was trading at $1.44; when it closed the rate was near to $1.46.

Sterling enjoyed a net daily gain of more than one and a half US cents.

But that was the pound's only daily gain: it was down by two thirds of a euro cent and made the same loss, -0.5%, on average against the other dozen most actively-traded currencies.

Moreover, unusually for a day on which the Greenback carried off the wooden spoon, the top performer was the Canadian dollar.

Three things conspired to bring down the US dollar: The president of the New York Fed cast doubt on the interest rate outlook, the price of oil headed higher and the US services sector purchasing managers' indices continued to deteriorate.

William Dudley set the scene when he said "financial conditions are considerably tighter than they were at the time of the December [FOMC] meeting".

The implication was that he saw no need to tighten them further by increasing interest rates.

After lunch, of the two services sector PMIs, one was at a 21-month low and the other was the weakest in nearly two years.

The dollar reacted badly to both of them.

On the broad front sterling had been doing quite well before the PMIs came out.

After they did, and when investors began to unload US dollars, the pound was trampled in the rush to buy euros (the quick and easy exit route for dollar-dumpers) and commodity- and energy-oriented currencies (higher oil prices encourage risk-appetite).