Sterling rose to one-week highs against the dollar and yen on Wednesday as a third day of gains on world stock markets signalled investor tensions easing, offering some optimism to the battered currency.
Sterling has gained more than three percent so far in the past three days, after slumping seven percent in the previous week to hit a 23-year low against the dollar at $1.3500 on Friday. The turnaround has been largely due to a rebound in British banking shares, triggered after Barclays Plc said on Monday that it would post a pretax profit despite a huge writedown last year, easing some concerns about the ailing sector.
"One of the reasons that sterling performed very badly last week was that banking equities generally underperformed," said Paul Robinson, chief sterling strategist at Barclays Capital. At 1518 GMT, sterling was up 1.0 percent at $1.4284, after rising to $1.4377, the highest since January 20. It also rose 1.8 percent against the yen at 127.95 yen, near a peak of 128.26 yen, also the highest since January 20.
Against the euro, the pound was up 0.5 percent at 92.62 pence. Britain's FTSE 100 index was up 2.1 percent by late afternoon trade. The dollar was also sold broadly ahead of the US Federal Reserve's policy decision later on Wednesday, on expectations for further monetary easing through the purchase of instruments, possibly long-dated US Treasuries, by the US central bank.
The pound's rise was tempered by expectations that UK interest rates, now at a record low of 1.5 percent, will fall further and that a severe economic slump will prod the Bank of England to take further unconventional steps. "The BoE looks most likely to follow the Fed and go to that next step of quantitative easing, which will keep significant downward pressure on the pound," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
"But we are not extremely bearish on the pound and believe it is in the process of topping out." Meanwhile, the head of the Organisation for Economic Co-operation and Development said a sharp fall in the pound, though volatile, is good for the UK economy. "Sterling weakness of course is going to produce more competitive UK exports that is of course good news for the UK economy," OECD Secretary General Angel Gurria told Reuters at the annual meeting of the World Economic Forum in Davos.
Separately, British Prime Minister Gordon Brown warned against policies directed at managing the pound's exchange rate. Brown said previous British attempts at targeting exchange rates had failed and that current Bank of England policy was to target inflation, in response to a question from opposition Conservative leader David Cameron. "That is the best way to bring about recovery in the economy and I would caution him (Cameron) and his party against any policies that would target sterling," he said.