The Bank of England’s quarterly inflation report has had a significant impact on sterling. The British currency continued to decline today, after the BoE lowered its UK growth forecasts for next year and said that inflation may undershoot its 2% target by 2012. With economic fundamentals in the US, Europe and now emerging markets showing further signs of weakness, investors are becoming more defensive and shifting their exposure from risky currencies to safe-haven assets denominated in US dollars and the Japanese yen. The US dollar’s perceived safe-haven status was in a way saved this week, after the Federal Reserve opted to reinvest the proceeds from its investments in mortgage-backed securities into long-dated government debt. The move was initially interpreted as Quantitative Easing (QE) – a measure that expands the supply of US dollars, which in turn dilutes the value of the currency, rendering commodities (priced in US dollars) relatively cheaper. However, the latest measure is not the purest form QE, since it does not increase aggregate money supply. As a matter of fact, the US dollar bounced back when the market realised this. The dollar seemed to benefit from the Fed’s mild form of stimulus because, unlike QE, it does not add to the country’s structural problems, and this means the dollar can retain its safe-haven status for a while longer. Looking ahead to this afternoon, investors should keep an eye out for the US jobless claims and import prices figures, both due for release at 1.30pm (London time). Anthony Grech, London