U.K. Pound Touches Highest Since 1992 as Inflation Accelerates

 

By Agnes Lovasz

 

April 16 (Bloomberg) -- The pound surged to its highest in 15 years against the dollar as reports showing faster inflation stoked speculation the Bank of England will raise interest rates twice more this year.

 

The currency rose for a fifth straight day after reports showed house prices rose and factory-gate prices increased the most in 11 months. The prospect of higher rates prompted investors to buy U.K. assets using funds borrowed in lower- yielding currencies such as the yen, which sank to the weakest in more than two months against the pound.

 

``The pound is stronger as interest-rate expectations have risen on the back of the housing indicator,'' said Adam Cole, a senior currency strategist at RBC Capital Markets Ltd. in London. ``I think we'll trade through $2.''

 

The pound touched $1.9940, its strongest since Sept. 9, 1992, and traded at $1.9905 at 4:22 p.m. in London, from $1.9863 on April 13. It also rose to 238.27 yen, the highest since Feb. 12, from 236.89 late on April 13.

 

The prospect of higher interest rates hurt U.K. government bonds. The yield on the benchmark 10-year gilt was at 5.07 percent, near the highest since August 2004.

 

The U.K. currency is at its strongest since billionaire investor George Soros and other speculators drove it out of Europe's system of linked exchange rates, known as the Exchange Rate Mechanism.

 

The then-U.K. Prime Minister John Major pulled the pound out of the ERM on Sept. 16, 1992, after authorities failed to keep it within its limit of 6 percent from a peg of 2.95 marks. Current Chancellor of the Exchequer Gordon Brown described that day as ``Black Wednesday.''

 

Inflation Signs

 

The pound surged today as a report showed house-price inflation quickened to the fastest pace in almost two years in February. Home values rose 12.1 percent in the year, the most since March 2005, according to Rightmove Plc, the country's biggest property Web site. Factory-gate prices gained 0.6 percent in March, up from 0.4 percent a month before, according to a government report today.

 

``Inflation is a problem,'' said Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in London. ``We could have people talking about not just one more quarter-point increase after one in May, but maybe two more.''

 

Chertkow said the pound may break $2 this week, and rise as high as $2.05.

 

The extra yield that benchmark U.K. government debt offers over inflation-protected securities is above the Bank of England's 2 percent inflation target, according to data compiled by Bloomberg. The difference represents the expected inflation rate among traders for the length of the bond....

 

...Blah Blah Blah Blah stuff about investments.

 

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Come on £1 = $2 :)

 

I wouldn't like to be an American coming to the U.K. in the next few weeks.

Come on £1 = $2 :)

It's certainly making the site cheaper to run :)

UK pound goes through $2 barrier

 

 

The pound has moved through the $2 mark for the first time since 1992, as investors bet interest rates would have to rise to slow inflation.

 

Consumer prices rose by 3.1% in March, the Office for National Statistics said. The ONS also said that its retail price inflation rate rose to 4.8%.

 

Many economists consider an interest rate rise in May to be a certainty.

 

By late afternoon on Tuesday, one pound was worth $2.005, having been solidly above the $2 mark since late morning.

 

The stronger pound has been good news for British visitors to the US, but has made life more difficult for exporters.

 

Moving up

 

The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992.

 

Analysts are now betting that the Bank of England will raise interest rates when it meets in May in an effort to slow consumer spending and price growth.

 

For the first time, the Bank of England governor has had to write a letter explaining why inflation has climbed.

 

Borrowing costs have been increased three times since August.

 

The key rate currently stands at 5.25% and is widely expected to go up to 5.5% at the Bank of England's next meeting on 10 May.

 

"A May move is a certainty," said Philip Shaw, economist at Investec.

 

"It opens up a strong possibility of interest rates rising beyond 5.5%," he added.

 

Higher borrowing costs act as a tax on consumers, boosting loan repayment costs, taking money out of their pockets and slowing the rate at which they spend and take on extra financing.

 

Further falls

 

Analysts said that the outlook for sterling will also depend on US economic data due later on Tuesday.

 

David Jones from CMC Markets said, "With US economic data due later in the session, further dollar downside may be seen in due course".

 

It is not only sterling that is strong at the moment. The euro is at two-year high against the dollar and a record high versus the Japanese yen.

 

Many traders said they were surprised that last weekend's Group of Seven finance ministers meeting in Washington did not make any comments about the weakness of either the dollar or the yen.

 

http://news.bbc.co.uk/1/hi/business/6562743.stm

Yep, I've been following this for a long time...........the planned Dollar devaluation is coming along nicely then.

 

Any Americans here should buy Gold coins........which has gone up in value.