Pound strengthens against dollar
The pound remained close to its highest level against the dollar since sterling left the Exchange Rate Mechanism (ERM) in 1992, despite positive economic news from the United States today.
Sterling strengthened to 1.9531 US dollars from 1.9509 US dollars as fears over the US economy persisted in the face of better-than-expected growth figures in the US.
It left the pound just below the 1.9545 US dollars it hit early this morning and the 1.9550 US dollars it traded at in December 2004, which was the highest level since before Black Wednesday when sterling left the ERM.
The dollar has been struggling since late last week over fears that the Federal Reserve will cut interest rates in a bid to boost the ailing economy.
The strong pound is good news for Brits heading to New York for their Christmas shopping with tourists getting as much as 1.92 US dollars for every pound at high street exchanges.
It also benefits firms importing goods from overseas as they get more for their money, although it is bad news for businesses reliant on exports as it makes their goods more expensive to buy.
The dollar managed to recover slightly against the euro, however, as European officials warned about the euro’s recent surge.
The euro softened from its 20-month peak of 1.3218 US dollars to 1.3170 US dollars after French Prime Minister Dominique de Villepin said the euro’s rise was weighing on competitiveness. French finance minister Thierry Breton also warned that strong movements in currencies are never good.
It came as the US Commerce Department said US gross domestic product increased at a 2.2% annual rate in the third quarter – well above the 1.6% initially expected.
The figures bolstered views that the US Federal Reserve can hold off a cut in interest rates which could undermine the dollar further.
It fell sharply yesterday as a spate of disappointing US economic news added further weight to the view interest rates will be cut.
Durable goods orders saw their biggest drop in more than six years, the median home price saw its largest year-over-year decrease ever, and consumer confidence fell to its lowest reading since August.
Those figures were enough to overshadow comments from US Federal Reserve chairman Ben Bernanke, who said inflation was “uncomfortably high”.
Higher interest rates, a weapon against rising inflation, tend to strengthen a currency by making investments in that denomination more attractive.
The prospect of lower interest rates in the US comes at a time when central banks in Europe are raising the cost of borrowing.
The Bank of England raised rates in August and again this month, and while economists are split as to whether there will be another rise early next year, few see rates falling in the near future.
Bank of England governor Mervyn King has warned that inflation in the UK will rise towards about 2.7% early next year from its current level of 2.4%, although he said he expected it to return to about the 2% target within two years.
Meanwhile, deputy governor Rachel Lomax, who opposed the rate rise earlier this month, today said there were no signs the economy had been “running too hot” ahead of the vote, offering some hope that rates have reached their peak at the current level of 5%.
However, she was only one of two members of the nine-strong Monetary Policy Committee not to vote for a hike.
In Europe, the European Central Bank has raised rates five times since last year to 3.75% while the Fed has left US rates on hold at 5.25% for three months following 17 hikes since June 2004.
The pound last hit two dollars on September 8, 1992, thanks to its link to the Deutsche Mark through the ERM. Germany was enjoying a post-1990 unification boom while the UK was suffering a recession.
Eight days later, on Black Wednesday, heavy selling of the pound for foreign currencies saw its value fall and sterling was forced out the ERM. The pound fell to 1.50 US dollars by Christmas 1992.
The pound remained close to its highest level against the dollar since sterling left the Exchange Rate Mechanism (ERM) in 1992, despite positive economic news from the United States today.
Sterling strengthened to 1.9531 US dollars from 1.9509 US dollars as fears over the US economy persisted in the face of better-than-expected growth figures in the US.
It left the pound just below the 1.9545 US dollars it hit early this morning and the 1.9550 US dollars it traded at in December 2004, which was the highest level since before Black Wednesday when sterling left the ERM.
The dollar has been struggling since late last week over fears that the Federal Reserve will cut interest rates in a bid to boost the ailing economy.
The strong pound is good news for Brits heading to New York for their Christmas shopping with tourists getting as much as 1.92 US dollars for every pound at high street exchanges.
It also benefits firms importing goods from overseas as they get more for their money, although it is bad news for businesses reliant on exports as it makes their goods more expensive to buy.
The dollar managed to recover slightly against the euro, however, as European officials warned about the euro’s recent surge.
The euro softened from its 20-month peak of 1.3218 US dollars to 1.3170 US dollars after French Prime Minister Dominique de Villepin said the euro’s rise was weighing on competitiveness. French finance minister Thierry Breton also warned that strong movements in currencies are never good.
It came as the US Commerce Department said US gross domestic product increased at a 2.2% annual rate in the third quarter – well above the 1.6% initially expected.
The figures bolstered views that the US Federal Reserve can hold off a cut in interest rates which could undermine the dollar further.
It fell sharply yesterday as a spate of disappointing US economic news added further weight to the view interest rates will be cut.
Durable goods orders saw their biggest drop in more than six years, the median home price saw its largest year-over-year decrease ever, and consumer confidence fell to its lowest reading since August.
Those figures were enough to overshadow comments from US Federal Reserve chairman Ben Bernanke, who said inflation was “uncomfortably high”.
Higher interest rates, a weapon against rising inflation, tend to strengthen a currency by making investments in that denomination more attractive.
The prospect of lower interest rates in the US comes at a time when central banks in Europe are raising the cost of borrowing.
The Bank of England raised rates in August and again this month, and while economists are split as to whether there will be another rise early next year, few see rates falling in the near future.
Bank of England governor Mervyn King has warned that inflation in the UK will rise towards about 2.7% early next year from its current level of 2.4%, although he said he expected it to return to about the 2% target within two years.
Meanwhile, deputy governor Rachel Lomax, who opposed the rate rise earlier this month, today said there were no signs the economy had been “running too hot” ahead of the vote, offering some hope that rates have reached their peak at the current level of 5%.
However, she was only one of two members of the nine-strong Monetary Policy Committee not to vote for a hike.
In Europe, the European Central Bank has raised rates five times since last year to 3.75% while the Fed has left US rates on hold at 5.25% for three months following 17 hikes since June 2004.
The pound last hit two dollars on September 8, 1992, thanks to its link to the Deutsche Mark through the ERM. Germany was enjoying a post-1990 unification boom while the UK was suffering a recession.
Eight days later, on Black Wednesday, heavy selling of the pound for foreign currencies saw its value fall and sterling was forced out the ERM. The pound fell to 1.50 US dollars by Christmas 1992.
