Sterling stays steady against euro

BRITAIN'S Monetary Policy Committee's decision to hold interest rates at 4.5% yesterday had little impact on the euro/sterling exchange rate.

Some modest slippage in the currency took place and it traded in a range of 66.90 to 66.60 to the euro.

By late afternoon trading it was steady at 66.80 and was at 66.90 in late afternoon trading.

Sterling dipped modestly against the dollar ahead of the noon announcement of no change.

From a European perspective, however, the euro/sterling relationship has been remarkably steady for quite some time.

Trade and not currency speculation drives the euro/sterling axis and for quite some time the relationship has varied by no more than 2p within a band of 66p-68p.

Keeping sterling steady to the euro is a plank of British policy, given the strong trading ties. And that has been a hallmark of the relationship that is likely to remain, says Ulster Bank financial markets economist, Niall Dunne.

"The speculative nature of the euro/dollar relationship is quite important. For a long time European investors, who have pumped a lot more money into the United States than the other way round, has been investing up to $2bn a day in America.

"How long this will continue if US interest rates move up is the big issue," he said.

With interest rates in the US rising, growth rate forecasts will fall.

"America may produce GDP of 5% this year, but the shift to higher bank rates will push that back down to well below 3% starting next year," said Dunne.

"That dip in growth and falling earnings will force investors from around to globe to target Asia, which is beginning to come on very strong in the past few years," he added.

Other concerns about the US economy, including its twin $500 billion deficits that have to be funded by massive inflows of global investors, leaves the dollar vulnerable. For that reason Dunne believes the weakness of the currency is not going to go away.

"Those structural issues are fundamental issues for the US that investors cannot ignore", he said.

That the dollar has weakened and remained weak against the euro is evidence of that, despite the fact that the US growth story is far superior to anything Europe has been able or is likely to deliver, he said.

For that reason it was "no surprise" the dollar hovered around three month lows against the euro yesterday at $1.2350 - $1.2382.

Its previous close saw it slightly weaker at $1.24.

Better news on jobs gave it a slight boost, but the pressure will be sustained as interest rates rise in the US, analysts believe.