Monday, June 25, 2007

Pound breaks through $2

Pound breaks through $2
By Peter Garnham
Copyright The Financial Times Limited 2007
Published: June 25 2007 11:33 | Last updated: June 25 2007 11:33

The pound rose through $2 for the first time since May 1 on Monday, building on strong gains from last week amid expectations of further UK monetary tightening.

“There’s still some speculation that we might see a quick rate hike from the Bank of England as soon as next month so this is lending a lot of the support,” said James Hughes, market analyst at CMC Markets.

He said with a raft of US economic data and the Federal Reserve’s decision on US interest rates all due before the end of the month, there was clearly scope for the pound to make a lasting move higher against the dollar.

“Sentiment regarding the US economy has been somewhat polarised of late and with the bears starting to prevail once again, it’s certainly feasible to see how a return towards the April highs could be forthcoming,” said Mr Hughes.

In April the pound traded up to a high of $2.0133 - level not seen since 1981.

On Monday, the pound rose 0.1 per cent to $2.0005 against the dollar and edged 0.1 per cent higher to £0.6727 against the euro.

Meanwhile, the dollar was little changed at $1.3455 against the euro as traders awaited US new home sales data due later in the session.

Meanwhile, the yen advanced as weakness on global equity markets trimmed investor appetite for carry trades, in which the low-yielding Japanese currency is sold to fund the purchase of riskier, higher-yielding assets elsewhere.

Demand for carry trades helped send the yen down to a four-and-a-half year low against the dollar, a record low against the euro and a 15-year trough against the pound last week.

However, the yen recovered on Monday, rising 0.3 per cent to Y123.55 against the dollar, 0.4 per cent to Y166.20 against the euro and 0.2 per cent to Y247.05 against the the pound.

David Simmonds at Royal Bank of Scotland said yen weakness was looking increasingly stretched at these levels.

“Yield spreads have moved in the yen’s favour against the dollar, and even some other currencies, and with volatility not falling and equities soft, the basis for yen weakness is starting to look more fragile,” he said.

Meanwhile, the New Zealand dollar recovered after falling back sharply late on Friday amid rumours of intervention from the Reserve Bank of New Zealand.

Talk that the central bank had intervened to sell what it considers to be an overvalued kiwi sent the currency quickly down from $0.7660 to $0.7605 against the dollar on Friday. However, the New Zealand dollar bounced back to $0.7655 on Monday.

David Woo at Barclays Capital said investors had simply taken the opportunity provided by the RBNZ to buy the currency at better levels.


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