U.K. Pound Extends Gain Versus Dollar

The U.K. pound extended its advance against the dollar after the Federal Reserve cut its target overnight lending rate three quarters of a percentage point to 3.5 percent in an emergency meeting.
TradingEconomics.com, Bloomberg 1/22/2008 10:17:23 AM

The pound also added to gains versus the yen as the Fed's reduction made investors more confident to buy higher-yielding currencies funded in the Japanese currency. The emergency action, the first by the U.S. central bank since 2001, widened the rate- differential between the pound and the dollar, boosting the appeal of the U.K. currency for these so-called carry trades.

The pound gained to $1.9590 by 3:35 p.m. in London, after earlier sliding to $1.9337, from $1.9434 yesterday.

The U.K. currency climbed as much as 1.7 percent to 209.44 yen, before trading at 208.78 yen, from 205.96 yen. It fell to 74.66 pence per euro, from 74.37 pence Jan. 21.

The pound may fall to $1.89 by year-end, From forecasts, because of a U.K. economic slowdown and interest-rate cuts by the Bank of England.

Ten-year gilts reversed gains, pushing the yield difference, or spread, with two-year notes to the most in three months and steepening the so-called yield curve, a chart of bond yields of different maturities.

Carry-trade investors borrow at the low interest rates available in Japan and Switzerland and convert the proceeds into a currency, such as the pound, they can lend out for a higher return. They earn the spread between the borrowing and lending rates, taking the risk currency moves will erase their profit.

Buyers were attracted to the pound as the U.K. central bank's 5.5 percent key rate is the highest among the Group of Seven industrialized nations. It compares with 0.5 percent in Japan and 2.75 percent in Switzerland.

The Fed's next policy meeting is scheduled for Jan. 30. The Bank of England will lower its main rate a quarter-percentage point to 5.25 percent when it meets Feb. 7, according to all 30 economists surveyed by Bloomberg News.

U.K. Pound Extends Gain Versus Dollar