Sterling rose to 1-1/2 year highs against the dollar on Friday, as investors ditched the US currency after China's central bank chief said the bank would diversify its $1 trillion foreign exchange reserves.
Zhou Xiaochuan told Reuters the diversification would include currencies and other investment instruments. China has previously spoken of plans to diversify, but in the markets Zhou's remarks intensified speculation that in future China would be buying fewer dollars.
"I don't think they've said anything that's significantly new it's just that the market has had its dollar negative hat on this week," said Ian Gunner, head of foreign exchange research at Mellon Financial Corporation.
Sterling also benefited as investors returned to the currency after Thursday's sell off, prompted when the Bank of England raised interest rates to 5 percent as expected but failed to give a clear signal on whether another hike was on the cards for next February.
The BoE's post-decision statement gave investors a good excuse to take profits in sterling, which has gained more than 11 percent against the dollar on the year to date. But overall, analysts said the economic and monetary policy outlook remained broadly supportive for the British currency.
Sterling rose as high as $1.9180, its highest since late April 2005, before retreating to $1.9142 at 1523 GMT, up half a percent on the day. Against the euro it gained 0.2 percent to 67.20 pence, off an earlier 3-1/2 week low of 67.45 pence.
Monday sees the release of UK October producer prices data, but next week's main highlight is likely to be BoE's November inflation report on Wednesday. "The forecasts they release next week are on the basis of market rate expectations, so if they are forecasting the consumer price index (CPI) in two to three years at target, that will validate those expectations and would be supportive for sterling," said Gunner.
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