Summary of main changes to exchange & interest rate forecasts

World financial markets virtually collapsed last year, as they experienced record levels of volatility. It took unprecedented government intervention, with the take-over of the top investment banks in the US and large scale rescue of other financial institutions to avert a systemic failure of the entire financial system.

World financial markets virtually collapsed last year, as they experienced record levels of volatility. It took unprecedented government intervention, with the take-over of the top investment banks in the US and large scale rescue of other financial institutions to avert a systemic failure of the entire financial system. This action was echoed around the world, with many countries also cutting interest rates to record lows and announcing fiscal expansion plans. In the last few weeks, there have been some signs that the situation is stabilising, but financial market conditions remains very poor and will likely require further government action to help kick-start a sustainable recovery.

 

Although economic challenges lie ahead this year, the unprecedented US policy response is likely to lessen the severity of the economic downturn. We continue to favour the US dollar against most major counterparts. In the UK and euro zone, interest rates still have further to fall, weighing on the respective currencies. Necessary deleveraging in the UK will weigh on growth and maintain downward pressure on sterling. Overall, £/$ is forecast to fall to 1.36 by mid-2009, while €/$ is projected to decline to 1.25. €/£ is expected to remain near 0.90 this year.
 

 

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