MARKET REPORT FRIDAY 4^TH JULY 2008

Good Morning,

The Currency Markets were focused on the European Central Bank’s decision on interest rates yesterday, following the Federal Reserve’s decision to keep rates on hold last week. There were high expectations of an increase resulting in steady buying support for the Euro against major currency pairs. Sterling moved from recent highs of 1.27 to trade below 1.25 before the rate announcement and the US Dollar traded above 1.59 against support for the Euro. The Dollar was also weakened by a sell off following the FED decision to keep rates at 2% with Sterling previously, briefly touching a high of 2.00. The currency market’s high and lows of Dollar sentiment and the Euro currency expectations have of course affected the UAE AED currency with rate movements from 7.15 to 7.35 against Sterling and 5.70 to 5.84 against the Euro over the past week.

Support for Sterling also evaporated after news that the UK building / construction industry had contracted at the fastest pace since records began in 1997. Britain ’s biggest homebuilder, Taylor Wimpey Plc, also suffered a record drop in share price after failing to raise fresh capital from investors. A spate of recent economic reports has indicated that the downturn in manufacturing combined with falling home values and slowing consumer spending could propel the economy towards a recession.

UK mortgage approvals have slumped to the lowest level in at least nine years, while home values have dropped by the most in June since 1992. Policy makers are advising that the Bank of England should avoid raising interest rates as the mortgage market edges towards stagnation. The Bank of England will make its decision on interest rates on Thursday10 th July, deeply concerned about inflation rising to 4 % levels, but fearful of a rate increase pushing the UK economy into recession.

The ECB as expected, increased interest rates taking the official rate to 4.25% however with the rate increase priced into the market and with mixed Euro-zone economic data the Euro fell sharply back to 1.2620 against Sterling . Analysts had been expecting a hawkish tone from President Trichet at the ensuing press conference but were disappointed as he refrained from committing to any further tightening or a series of rate hikes. Higher retail sales in the region were not enough to halt the slide from highs against the Dollar of 1.5905 to an eventual low of 1.5680. However, in a recent interview with a German newspaper, Trichet warned that there was a continuing risk of inflation “exploding” above 4% this year and urged other Central Banks to act quickly and decisively.

With the U.S markets closed due to the 4th of July long weekend, liquidity was scarce following the much anticipated U.S Non-Farm Payroll and Unemployment data releases. The closely monitored data which reports on the change in employment excluding the farming sector came in close to expectations with a loss of 62k jobs for the month of June. Since Wednesdays poor ADP employment report investors had began pricing in the possibility of a much lower payroll number and when the 62k figure was released it triggered a rebound in the Dollar against the Euro, also taking USD/JPY up to an overnight high of 106.90. However, the unrelenting rise in oil prices has continued to dominate and weigh both on Dollar sentiment and Global concerns with the joint dilemma over inflation and prospect for recession.

Michael Ince

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