Weekly Financial Markets Review by Lloyds TSB

News that the UK economy contracted in Q3 for the first time since 1992 and the warning by BoE governor King that the economy is now ‘entering a recession’ sent sterling sharply lower this week, leading the currency to post losses of more than 8% against the dollar and over 15% against the yen.

News that the UK economy contracted in Q3 for the first time since 1992 and the warning by BoE governor King that the economy is now ‘entering a recession’ sent sterling sharply lower this week, leading the currency to post losses of more than 8% against the dollar and over 15% against the yen. The dollar and the yen were the biggest gainers this week as market participants exited emerging
markets. East European currencies were hit by a meltdown in confidence and rising fears that intervention by the IMF will be required to stabilise some economies.

Fears that Argentina will again default on its debt sent a tremor through other emerging markets, leading to sharp falls in equities and outflows of capital. Central banks in Canada, New Zealand and Sweden responded to the outlook for weakening economic growth with interest rate cuts. Denmark and Hungary were forced to raise interest rates to stem the selling of their currencies. Fears about the state of the global economy intensified this week and sparked a rush out of equities and emerging market currencies into the safe haven of the US dollar and the Japanese yen, leading to substantial appreciation of both currencies. Sharp declines in leading indicators
of economic activity in the UK, the US and the euro zone -combined they represent nearly 50% of world gdp – heightened fears of a severe global economic slowdown. China also reported weaker than expected gdp growth data for Q3. Perversely, the appreciation in the dollar and yen could dampen US and Japanese exports by making
traded goods more expensive. This is not welcomed under a scenario where consumer spending and business investment are already exercising downward pressure on overall output growth. The dollar soared to a high of 1.5269 against sterling and to 1.2497 against the
euro. However, the dollar lost substantial ground against the yen. A dramatic fall in US equity markets on Friday sent $/Y plummeting by 5% to a 12-year low of 90.93.

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