Sterling reaches 13-month highs versus dollar

Tom Tong01/Mar/2011Currency Updates

GBP

This morning we have seen cable reach its highest level since 20 Jan 2010 – a 13-month high.

Sterling performed well against a weak dollar on Monday, bolstered by month end selling of USD by London-based hedge funds and renewed fears that spiralling oil prices will damage growth in the US economy and keep US interest rates supressed. The pound was up at its highest level in four months against the dollar through Asian trading into this morning as expectations of BoE rate hikes continued and Asian traders mulled over what the long term impact high oil and commodity prices will have on the US economy. However, key market analysts feel that sterling could be vulnerable this week ahead of Purchasing Managers Surveys in both the service and manufacturing sector. Sterling will lose support if we see weak numbers as the BoE will want to see a firming up of economic recovery in the first quarter if speculation over hikes in interest rates is to continue. The precarious situation In the UK was highlighted on Friday by the contraction in GBP during the fourth quarter.

USD

The greenback declined sharply on Monday and failed to regain its footing in Asia as high oil prices and the Fed’s dovish rhetoric continued. The dollar index, which tracks the performance of the currency against a basket of major currency pairs, was at a 3 and half month low yesterday. The market anticipates that the Fed Chairman Ben Bernanke will remain cautious over the state of the US economy in his twice yearly testimony to the Senate at 15:00 UK time. Many feel he will reiterate his view that the economic recovery that is still not strong enough to significantly reduce the jobless rate, suggesting the time is not ripe for US interest rates to rise. In this sense the Fed is still at odds with the other key central banks that are clearly worrying about price pressures and interest hikes in the near term.

EUR

The euro lost ground against sterling yesterday but gained versus the weak dollar as fears over an oil shortage calmed and investors looked towards Thursday’s key ECB policy meeting. The euro received some support yesterday from the news that Saudi Arabia will be able to increase oil production to offset losses in Libya, meaning the single currency block will not suffer from fuel shortages in the near term. The markets are keenly focused on the results of the European Central Banks policy meeting on Thursday as a variety of issues look to be resolved. Policy makers are contending with a potent mix of new economic forecasts, the removal of crisis support measures and bailouts and hard talk on inflation. Despite a small negative revision in Eurozone inflation yesterday, the single currency benefitted from speculation that the ECB will signal a willingness to hike rates in Thursday’s meeting.

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Written by Tom Tong

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