Currency watch: Rising prices cause chaos at home and abroad

World food prices are continuing to run higher according to the United Nations, a trend that is only likely to continue should problems in oil markets persist.

A fair bit of the grain increase has been as a result of poor weather and forest fires in major exporting markets such as Russia, Brazil and Canada, although the recent oil price jumps have done a lot of damage too.

While this has manifested itself in North Africa and the Middle East in the form of riots, protests and the fall of governments, here in the UK it is hammering consumer confidence.

At a time when the house you live in is probably down 20% in price and the jobs market is sketchy at best, the last thing anyone wants to see is the price of your daily staples jumping by 10-20%.

Obviously this leads to a fall in sales and activity in the services sector which is hampering the pound at the moment. While it has been able to make ground – to a 13 month high, no less, against the US dollar as the greenback falls on yield differentials – it is still unable to break higher against our main trading partner; the euro.

As we have said in the past, it seems that the market can get myopic when a new crisis raises its head and although the European debt issues are still completely unresolved, traders are continuing to bid up the single currency on the belief that interest rates will rise soon. I can’t see it personally, but the battles continue.
 
Jeremy Cook, chief economist at World First foreign exchange, 04.03.2011