Federal Reserve Chief Ben Bernanke and his band of merry men held interest rates in the US at 2.0% confounding expectations that a cut may be used to free up capital in the wake of the demise of Lehman Brothers. Their refusal to lower the cost of money is a strong message and has underpinned the dollar overnight although this was offest by an announcement made a couple of hours later.

Under normal market conditions the US congress would be up in arms over the AIG deal; socialism run amok. In the current climate however it is the most sensible thing that has happened in a while. The Treasury has in essence bought nearly 80% of AIG in exchange for an $80 bln loan to be repaid over the next 2 years. AIG has been rightly described as ‘too big to fail’, its tentacles spread far and wide and their severing would cause an unimaginable meltdown.

Reserve Primary Fund, a name unfamiliar to most, has become the first public victim of the fallout from Lehman Brothers. The company has not gone under however will be writing off $785 million of debt issued by the Wall St firm. As a result redemptions from the fund have been suspended for up to 7 days.

Lehman Brothers was unable to find a buyer when it was on its last legs however now that is has expired a British vulture has swooped. Barclays has cherry picked the investment banking arms of the firm to purchase for a knockdown price of $1.75 billion. It has also bought the iconic headquarter building as Britain’s 3rd largest bank tries to break into the upper echelon of US securities firms.

Electricity, fuel and food price rises caused UK CPI to jump to its highest level in 16 years yesterday. In his letter to the Chancellor, Mervyn King stated that he believes that CPI will stay ’stubbornly’ above the bank’s 2 % target well into 2009. Opinion, as always is split over what the MPC should do to alleviate these pressures; the letter was fairly hawkish and had given sterling a shot in the arm however most commentators are still expecting a cut by the Bank of England by the end of the year.

Yesterday also saw the German ZEW economic sentiment index move higher than expected as the recent falls in oil prices and weakening of the euro have allowed some semblance of order to return. These figures must be taken with a pinch of salt however as the survey was cast before news of the demise of Lehman was made public.

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 Please feel free to contact me (jeremy.cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.   

Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.

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