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Dollar slumps and gold rallies after US debt deal
by Chris Marshall on Oct 17, 2013 at 09:54
The US dollar dropped sharply against the British pound, euro and Japanese yen, while gold moved in the opposite direction as markets digested the news that US politicians have agreed to raise the debt ceiling, avoiding default.
Currencies were being buffeted by a number of different forces as investors considered the economic implications of the two-week government shutdown that has just been brought to an end – at least until early next year.
The US Federal Reserve is now no longer expected to start reducing the scale of its stimulus scheme this year.
'Economic data has been delayed, distorted and depressed by the shutdown...we would not expect tapering to begin until March next year with the possibility it will be delayed until June to accompany a press conference from new chair Janet Yellen,' commented Schroders' chief economist Keith Wade.
Continued stimulus keeps the dollar low and some analysts were re-evaluating their forecasts for dollar strength.
Ratings agencies were also making gloomy noises. Dagong, a Chinese ratings agency, downgraded the US credit rating to A- from A. Standard & Poor's said the shutdown had sucked $24 billion from the US economy.
Earlier UK rate hike?
Meanwhile there was news to support the pound, which rose 0.7% against the dollar to $1.6066. The Bank of England’s chief economist Spencer Dale told the Guardian newspaper that interest rates could be hiked as early as next year.
‘Conceivably [a rate increase] could be 2014. But it would have to be in a world where you had quite strong growth, perhaps stronger than you have got now, and a recovery in productivity weaker than I would expect,’ he told the Guardian.
The pound was also supported by a better-than-expected UK retail sales report for September, with an increase of 0.6%. Alan Clarke of Scotiabank described this performance as ‘solid, if unspectacular’.
The euro was up 0.7% against the dollar to $1.3620.
Gold, which tends to move in the opposite direction to the US dollar, rose nearly 2% to $1,305 per ounce. Silver was also trading up 2%, to $21.
But this rally in precious metals won't last, argued Commerzbank's Carsten Fritsch: 'Despite the ongoing uncertainty among market participants, we do not expect gold and silver prices to make any significant recovery in the short term – this is precluded by further ETF outflows'.
'Bought the rumour, sell the rally'
Of shares, Wall Street rallied strongly, but the sentiment wasn’t matched in Asia, nor in Europe this morning where a classic ‘bought the rumour, sell the news’ reaction seemed to be in place. The FTSE 100 dropped 0.3% to 6,549.
In London BskyB (BSY.L) shares leapt 5% higher, to 920p, as investors welcomed a financial update which suggested the pay TV company was faring well in the face of competition from new competitor BT Sport.
Boasting ‘a very strong start to the year,’ the company reported a 7% rise in revenues and 8% decline in operating profits – both better than expected by the City.
‘We are pleased with these robust results which provide a reminder of many of the group’s underlying attractions (particularly against the backdrop of increased competition and the recent launch of BT Sport),’ noted Roddy Davidson, analyst at Westhouse, who raised his target price to 985p and reiterated his ‘add’ recommendation on the shares.
Travis Perkins (TPK.L) was the biggest faller on the FTSE 100, down nearly 3% to £17.28, after the building materials supplier posted an 8.6% rise in third quarter sales.
‘In our view, an increase in consumer confidence and housing transactions is likely to fuel further sales growth as we move towards 2014,’ said Gavin Jago of Shore Capital, who keeps his ‘hold’ rating on the shares.
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