Pound peaks as US dollar falls
Staff and agencies
Wednesday December 1, 2004
The pound rose to its highest level against the US dollar in more than 12 years today, in the latest sign that the UK economy is strengthening.
Sterling hit a peak of US$1.9223 - its highest level since the UK was forced to withdraw from the Exchange Rate Mechanism in September 1992 - while the dollar fell to a nine-year low against a basket of currencies.
The development, which made the prospect of two US dollars to the pound increasingly likely, came as manufacturing data signalled the sector was recovering from its recent weakness.
It was also prompted by the record US current account deficit, which is expected to continue to widen unless the dollar depreciates.
Although the news will be welcomed by shoppers heading across the Atlantic for Christmas bargains, British companies dependent on the US will suffer as their goods become more expensive.
Tom Hougaard, strategist at City Index, said: "This is momentous. It is really frightening, it is an indicator that the big foreign investors are pulling the plug on the US."
The dollar dropped further against world currencies today - hitting another record low against the euro - amid speculation that the Federal Reserve will say a weaker dollar should help narrow America's ballooning budget deficit.
Robert Barrie, economist at Credit Suisse First Boston, said concern about the US current account was a major factor in the rise in sterling. But he added that signals the UK economy was getting stronger had helped tipped the pound to today's high.
The pound's surge today took it to levels not seen since before the UK was forced to leave the Exchange Rate Mechanism on what was described as Black Wednesday. This caused the pound to tumble against other global currencies including the dollar.
The latest rise coincided with data signalling that the UK economy was getting stronger, which boosted sterling. Yesterday, Bank of England governor Mervyn King denied that recent rises in interest rates had put the UK economy on the brink of "a real slowdown".
Figures from Nationwide also boosted the currency, as they showed house prices recovered from a fall in October to rise by 1% last month. This was followed by today's upbeat data from the Chartered Institute of Purchasing and Supply (CIPS), whose manufacturing report painted a picture of a strong industrial recovery.
The surprise pick-up came as separate research showed European counterparts had endured a period of stagnation.
In the UK, the Purchasing Managers Index from CIPS posted exactly 55 - above the no change in activity mark of 50 for the 17th month in a row. The figure showed the fastest growth since July, following a surge in domestic orders.
Economists called the data an encouraging signal for UK industry, but warned it was too early to talk of a sustained recovery, particularly after GDP growth of 0.4% in the third quarter and a poor recent factory study from the CBI.
Paul Dales of Capital Economics said: "Although today's survey is undoubtedly encouraging, we will need to see a meaningful improvement in the hard data before concluding that industry has shrugged off the weakness evident in the third quarter.
"For the time being, it still looks like other areas of the economy may not be able to compensate for the slowdown in household spending that appears to be under way." |
