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Market Update

Currency exchange rates and interest rates are to the fore with sterling maintaining a position of more than USD2.00 to the pound. The last time the sterling/ dollar exchange rate was at such a level was in September 1992, following which the UK currency fell 25% after it was forced out of the European exchange rate mechanism. Few analysts appear to expect such a fall this time around with many reportedly of the view that in a year's time the pound will be at USD1.91, 5% below its current level.

With increased expectations that interest rates in the UK may have further to go and that US rates will remain at 5.25% or perhaps fall by the end of the year, there has been one prediction that the pound will reach USD2.10 over the next year.

Following a letter from Mervyn King, the Chairman of the Bank of England Monetary Policy Committee (MPC), to UK Chancellor, Gordon Brown, detailing the factors that have been driving the UK's rate of inflation above its 2% target, it is anticipated that the MPC will increase the UK's base rate to 5.5% in May, with the money markets reportedly pricing in a rise to 5.75% or perhaps even 6% later in the year.

On the equity front, last week the UK's FTSE 100 broke through 6,500 for the first time since September 2000. It finished the week at 6486. Over the last year it has risen 6.7%, while over three years it is up 42%.

US stocks moved towards new highs last Friday assisted by a flow of positive earnings reports. The Dow Jones rose 153 points to 12,961 with the Nasdaq rising 21 points to 2,526.

The Chinese equity market continues to attract attention. Unlike in some more established markets, where investor sentiment tends to be quelled by weak economic growth data, investors in China have become nervous because economic growth is too strong. This has led to concern that the Chinese Government may act to bring economic growth under control and that equity markets may suffer in the short term.

In Japan, the Nikkei 225 has been trading around 17,500. Concern that profits at the country's main exporters will be negatively affected by a strengthening yen has stifled the market's progress. The yen has risen against a number of major currencies after Standard & Poor's raised Japan's long-term sovereign debt rating and long-term senior debt rating to "AA" from "AA-".

Turning to oil, unrest following elections in Nigeria, the world's eighth-largest oil exporter, has heightened concerns over potential disruption in supplies, with Brent crude for June delivery rising 22 cents to USD68.37. Nigeria has lost about a quarter of its output as a result of militant attacks that began more than a year ago.

Talk of potential strike action by Belgian workers at four oil refineries in Antwerp over pay and bonuses has also been reflected in oil price movements.

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