International Financial Markets Outlook – May 2008 by Lloyds TSB

We expect the stabilisation in the US dollar seen in the past month will lead to sustained recovery in the medium term, as the US economy shows signs of stronger growth in the second half of the year.

Summary of main changes to exchange rate forecasts

We expect the stabilisation in the US dollar seen in the past month will lead to sustained recovery in the medium term, as the US economy shows signs of stronger growth in the second half of the year.

Despite our forecast for UK interest rates to remain on hold, we expect that other key determinants of the pound’s exchange rate, notably the high fiscal and current account deficits, will push £/$ lower in the medium term, to 1.86 at year-end and 1.77 by mid-2009. We see £/€ to be in the 1.25-1.30 range in the next 12 months.

There are tentative signs that the worst of the credit crisis may be over, helped by further measures by central banks, including the Bank of England, to boost liquidity and to swap high-rated mortgage debt for sovereign debt. Consequently, interbank rates have started to edge lower.

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