Sterling slipped against the dollar on Tuesday, giving up gains after comments from a Federal Reserve official that interest rate rises may be needed before labour and financial markets recover boosted the US currency. Sterling slipped around 0.2 percent to the day's low of $1.9992 after Philadelphia Fed President Charles Plosser said that keeping interest rates low for too long could worsen the inflation problem.
While US rates at 2 percent would have a mountain to climb in catching up with the UK, sterling's yield advantage would potentially be eroded by rising US borrowing costs. The Bank of England has been struggling to balance a sharply slowing economy with surging price pressures stemming from rising energy and food costs, making it reluctant to cut interest rates from the current 5 percent.
Analysts said that despite the pound's knee-jerk reaction to Plosser's comments, sterling would remain supported so long as the BoE resists a rate cut. "Sterling's strength has been surprising given the downside risks to the UK economy," said Paul Robson, currency strategist at RBS Global Banking.
The pound had climbed earlier to $2.0075 and stayed in range of a near four-month high touched last week despite data showing that UK property transactions hit their lowest since at least April 2005, fuelling worries that the UK economy is heading into a recession. The euro slipped around 0.1 percent to 79.40 pence but stayed in range of a one-month high of 80.22 pence hit earlier in July.
Market participants said that sterling was being whipped around by recent, broad weakness in the dollar, which has been battered by problems at US mortgage giants Fannie Mae and Freddie Mac, as well as weak earnings from domestic banks.