Sterling outperformed its major counterparts as traders increased bets on the Bank of England raising interest rates in order to combat inflation sooner than expected. Disappointing US retail sales weighed on the US dollar while fourth quarter eurozone growth figures further highlighted the two-speed recovery within the area. The Swedish Krona was bolstered after the Riksbank raised interest rates to 1.5 per cent in response to rising inflation while Chinese consumer price inflation came in below expectations making it less likely that the People’s Bank of China will tighten monetary policy which could suffocate growth prospects. Investors, encouraged by yesterday’s developments, sought higher yielding currencies which naturally dampened demand for the Japanese yen which fell to two-month lows against its US rival.
Sterling
The pound rose sharply against both the euro and dollar while reaching almost six-month highs against the yen after annual consumer price inflation rose in line with expectations to four per cent in January. With price levels now twice the Bank of England’s two per cent target, governor Mervyn King was forced to write yet another letter of explanation to the government in which he conceded that inflation could even hit five per cent over the next few months. There was enough evidence in the letter to convince investors that rate hikes are in the pipeline although the governor’s tone suggested they will be more gradual as growth risks still remain.
US Dollar
Data revealed that consumer spending, which accounts for a huge portion of US economic activity, got off to a disappointingly slow start in 2011. Even though the dollar lost further ground against higher yielding rivals such as the pound and euro, the currency managed to achieve almost two-month highs against the Japanese yen as markets remain upbeat about future growth prospects in the US.
Euro
The single currency remains under pressure, losing further ground against the in-demand UK currency. Growth figures released did little to inspire the euro but again highlighted the divide among stronger euro zone economies and those on the periphery.
Japanese Yen
As the global economic recovery continues to pick up pace, demand for the low yielding yen declined further on Tuesday with the currency reaching significant lows against the euro, dollar and pound.
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