Financial Markets Review by Lloyds TSB

Selling pressure on the dollar remained in August, as the US economic recovery lagged that of Germany and France, and even Japan.

Summary of main changes to exchange & interest rate forecasts

Selling pressure on the dollar remained in August, as the US economic recovery lagged that of Germany and France, and even Japan. Sterling moved like the US dollar in the last month, with the pound sagging a little against the euro, but gaining versus the US currency. There are increasing signs that the US and UK economies will return to growth in Q3. At that point (the figures are due to be released in late October), the US dollar in particular could find support. But despite signs of economic recovery, short and long term interest rates remain low, below even where they were a few months ago. Our view is that interest rates will remain depressed until a sustained economic recovery leads to the implementation of exit strategies from central banks that have loosened policies to exceptional levels to kick-start economic recovery. Meanwhile, many emerging market economies, unencumbered by the same financial crisis that has hit developed countries, are recovering strongly, boosting their currencies and commodity prices.

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