[A-List] UK economy: an old story, retold

[Michael Keaney]

Sterling tumbles as UK trade deficit surges
by Steve Johnson in London
Financial Times: March 10 2004

Sterling tumbled on Tuesday as the UK's trade deficit surged to record
levels and industrial production figures undershot expectations.

The deficit hit £5.6bn in January, far in excess of consensus forecasts of
£4.2bn. A £1.5bn fall in exports and a 30 per cent month-on-month drop in
exports to the US heightened concerns that the strength of sterling, which
hit an 11-year high against the dollar last month, is beginning to hurt
exporters.

A modest 0.1 per cent month-on-month rise in UK industrial production, just
a fifth of that expected, further deepened the gloom.

ING argued that the next Bank of England rate rise had probably been pushed
out to May, rather than April. A rally in short sterling futures indicated
the market was now pricing in the likelihood of only one more rate rise by
June.

Sterling fell to $1.8415 against the dollar after hitting one-week highs of
$1.8586 before the release of the data, with the move exacerbated by
short-term speculators being long in sterling overnight.

However, few expect sterling's slide to continue for long. Despite
describing the trade figures as "shocking", Monica Fan, senior currency
strategist at Royal Bank of Canada, cited the UK's high real interest rates
and said: "Our view is still that sterling will rebound to $1.87-$1.88 over
the next month."

The euro was little changed against the greenback, settling at $1.2439,
despite German industrial production data disappointing, leading some to
conclude that euro strength is taking its toll. However the single currency
hit a three-week high of £0.6754 against sterling.

The yen strengthened against the dollar, trading at Y111.17 after falling as
low as Y112.14 overnight, amid speculation that the Bank of Japan had
temporarily stopped its intervention.

One school of thought was that the Japanese authorities had eased off in the
wake of comments from John Snow, the US treasury secretary, that gave the
impression that Washington was not happy with "manipulated markets". BoJ
intervention is believed to have scaled new heights on Friday, possibly
provoking a private response from the Bush administration.

Alternatively, the BoJ's pullback may simply indicate it wanted to
discourage speculators from holding long yen positions, which it has now
done, rather than actually reversing yen strength.

"The fact that the Japanese authorities are believed to have stepped away
from the market will fuel a belief that the overriding objective is to
ensure that the dollar closes above the Y110 level at the end of March,
rather than attempting to achieve a level of, say, Y115," said Derek
Halpenny, currency economist at Bank of Tokyo-Mitsubishi.

The New Zealand dollar firmed against its US equivalent, rising to a week's
high of $0.6829, ahead of a possible rate hike today.