Currency watch: Breaking news just keeps on coming

The news is coming in at such a rapid rate these days, there’s barely enough time to draw breath and take stock of the situation.

In the UK, the impact of the Bank of England’s surprise decision to provide a £75 billion injection of quantative easing (QE) is still yet to materialise fully, but you have to think that sterling will stay unloved in the short term.

As the world economy tips back towards a global recession every central bank knows that the export market is the key to growing your way out of the downturn.

The simplest way to grab more exports is a weak currency, so you can see the Bank’s rationale. Many believe that this £75bn bazooka is just the beginning, and that a further £225bn could be used in the not too distant future.

This “competitive devaluation” strategy was started by the US Federal Reserve’s first round of QE and has been perpetuated by further policy programmes. The latest include the Fed’s “Operation Twist” and the Swiss National Bank’s move to fix the Swiss franc floor versus the euro.

Across the pond, the fact that the US government have gone forward with Operation Twist does not mean that a new, fully-fledged QE programme will be launched this year, especially if the European debt situation and the associated strain on banking remains unresolved.

After the initial announcement about Operation Twist, the US dollar went on a bit of a tear and made about 2.5% against the pound in the following 48 hours.

However, since then news from elsewhere has dominated and this initial spurt has subsided as the crisis agenda has fixed its glare elsewhere.

There is also the issue of the banks to consider. Moody’s has downgraded many of ours in Britain and this means that instead of talking about some banks being “too big to fail”, in the future we may instead be talking about some being “too small to care”.

Any downgrading of banks will naturally lead investors to worry about security. However, if there is any truth in assertions that this is not a result of the deterioration of their financial positions, then it could mean that (strangely) the British banking sector is doing better than had been expected.

Meanwhile in the Eurozone we seem to be no nearer to a satisfactory conclusion. The euro remains under threat from chronic debt problems in Southern Europe, and the big question is where is the money going to come from?

If the money is going to be drawn from the European Financial Stability Facility then it would only just cover the liabilities of the banking sector and leave nothing for the sovereign debt crisis.

This presents an altogether scarier prospect than the difficulties we are currently looking at, but with the drama unfolding thick and fast it’s really anyone’s guess as to what will happen next.

Jeremy Cook is chief economist at World First foreign exchange