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Published on March 9th, 2010 | by john.weir

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Currency update from Australia

There was a scare for sterling in January, when it dipped to a new 25-year low below $1.74. It did later return to the top of the $1.72-$1.83 range that it has occupied since November, but in the second half of February it was again flirting with the long-term lows.

With its economy strongly linked to commodity exports, the Australian dollar depends on an upbeat global economy. So far this year, the attitude among investors has been less positive than it was last year and demand for the Australian dollar has faded. It did not help matters that the Reserve Bank of Australia (RBA) failed to raise interest rates in early February – a move that had been expected by almost everyone. Australian interest rates probably do have further to rise, but the RBA seems to be in no rush to get them going.

The pound has two millstones around its neck – either of which would be a burden, even on its own. With a general election on the cards, probably in early May, investors are worried that there is a real danger of a ‘hung parliament’. With no overall majority, the government would be unable to force through the unpopular measures needed to balance the budget. At the same time, and for the same reasons, Britain risks losing its top-level AAA credit rating. That would be bad news for the government – and the mere prospect is already bad news for the pound. Expect no miracle recovery.

David Kerns, Private Client Dealing Manager, Moneycorp.



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