Financial Market

This week has not been particularly favourable to the dollar and today hit a new low against the euro amid fears continued fears for the US economy.

Uncertainty over the US economy has been further fuelled by poor job figures released in the US this week. In the report by the US labour department it was indicated that the US had seen an unexpected decline of 63,000 jobs in the month of February, the sharpest sign yet that the US is heading, or is in the midst of a recession.

At its lowest the euro was worth as much as $1.546 while the pound was worth $2.016 and the yen 102.91 to one greenback.

Both leading European currencies received the boost against the greenback after Frankfurt and the Bank of England decided to keep interest rates on hold on Thursday in order to curb inflation, which is currently at its highest rate in six years within the eurozone. Meanwhile the FED has been reduced its interest rates in order to tackle a cooling economy.

After the ECB’s comments on inflation it was made clear that the European central bank is more concerned about inflation in the eurozone than a potential fallout from the rising price of the euro, suggesting the benchmark interest rate will remain at 4% in the near future. This is in stark contrast to both the FED and Bank of England who are likely to cut interest rates.

Although this may be initiating a degree of profit taking there have been knock on effects to European based export companies who have seen their products become more expensive than their American counterparts.

The US dollar fell against both the Euro and the Yen and marked a two and a half year low on the Swiss Franc on Wednesday after figures were released showing consumer prices for December in the US were higher than forecasted, increasing concerns regarding inflation at a time of slowed economic growth in the US.

Disappointing retail figures for Decembers have also suggested that the US economy might be facing deeper problems, and falling global stock markets have also fuelled speculation that the Fed could cut rates by as much as 75 basis points soon.

Investment bank Goldman Sachs has already predicted that the US economy will fall into recession in 2008, and December’s retail data will confirm the worst for many analysts’.

As consumer spending accounts for two-thirds of the US economy, the retail figure for December could go a long way to supporting that Goldman’s fears are in fact correct

The high December prices coupled with a slowing economy however, leaves the Fed in a delicate position. Fed chairman Ben Bernanke’s has made comments suggesting that the central bank is willing to take “substantive additional action” to maintain growth which leads many to hold expectations of at least a half percentage point cut in the Fed’s benchmark interest rate, but lower rates cut the attractiveness of dollar-denominated securities and reduce demand for the dollars to buy them.

Citigroup has also reported its first quarterly loss since its establishment in 1998, and being the first bank to release its results for the last three months of 2007, its figures are seen as an indication of the effects the crisis in the sub-prime mortgage sector will have on the rest of the banking sector.

With a further decline of the Dollar brought on by figures supporting more weak bank earnings, inflation could rise further leading many to question and the Feds aggressive rate cuts.

“A rise in the core (inflation) to 2.4 percent could start to question the Fed’s presumed path of aggressive rate cuts — sending equities sharply lower,” said ING in a note to clients.

The price of gold passed a 28 year high of 850 dollars an ounce today following unrest in Pakistan and political turmoil in Kenya fuelled demand for the precious metal.

The current price of gold which hit $866.53 on the London Bullion Market, which although in part been contributed towards by the declining dollar which fell against the Euro again today, is as a result of demand brought on by safe haven buying.

The relationship between political unrest and an increased interest in gold is nothing new, and in troubled times gold is often seen as a safe haven for protecting investment funds from the impacts of inflation seen with stock and share investments.

Historically gold has not seen the rises of in 2007 (up 30%) since 1979, when the Iranian revolution crippled crude oil exports and US inflation hit 13%.

The rises in gold have come as record oil prices have been gradually driving up inflation, and supplies from South Africa, the world’s biggest producer, have dropped to the lowest in 84 years.

The demand for the metal has also has arisen due to heavy losses in credit markets which have spurred demand for alternatives to stocks and bonds. With the dollars drop investor interest in dollar-priced commodities is growing as they become cheaper for buyers using stronger currencies.

“Investors are worried about the oil prices and the weak dollar. When the situation is unstable, they invest their money elsewhere and this has boosted buying interest in gold” - Gary Yue, a gold dealer at Delta Asia Financial Group.

Also a factor in the rise of the price of gold, according to the World Gold Council, is the increased volume of jewellery purchases in emerging economic powerhouses China and India.

Gold is tipped to continue to increase in value over the coming months. Amongst the aforementioned reasons for the precious metals popularity, it believed many investors will continue to look at gold as a way of protecting reserve funds from acceleration inflation.