Sterling was among the biggest winners against the dollar on Tuesday, hitting a three-week high in a day of turmoil when Russia's rouble plunged by as much as 25 percent as oil prices slid below $59 per barrel. The pound also got a boost when Bank of England Governor Mark Carney played down data showing UK inflation fell to a 12-year low in November.
As the rouble skidded as far as 80 to the dollar, investors scrambled to safety, driving down US Treasury yields and weighing on the dollar across the board. Sterling rose as high as $1.5785, its strongest since late November, and was last trading at $1.5732, up 0.6 percent on the day. Against the euro the pound was up 0.1 percent at 79.46 pence.
There was some discussion over whether capital flight out of Russia into the UK was boosting the pound. "There may be an element of that. Sterling would be one exit route for someone pulling out of the rouble," said Ian Gunner, portfolio manager at Altana Hard Currency Fund. But Gunner added that it was difficult to fully rationalise sterling's move up and that it was likely to have been the result of investors cutting risky positions in the last full trading week of the year, with liquidity drying up.
The pound had earlier dipped to a three-week low against the euro after data showed the UK's consumer price index rose by just 1.0 percent annually in November, leading investors to bet the data would take yet more pressure off the Bank of England to raise interest rates any time soon. But sterling recovered after Carney said that falling oil prices were "unambiguously net positive" for the UK economy and that the inflation data left the bank's policy stance unchanged.
"There's some relief that the Bank of England is willing to look through downside surprises on inflation," said Daragh Maher, a currency strategist at HSBC. "That gives you your near-term reaction but the reality is that the Bank of England is still fighting inflation expectations that are lower than was previously envisaged."
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