"Sterling has reasons to be bought," said Trevor Williams, an economist at Lloyds TSB bank. "With base rates at 5.5 per cent and higher money market rates, unless there's a crisis you'd stay in the UK. The euro doesn't have the confidence of the foreign exchange market."
On Friday the pound climbed as high as pounds 0.6274 per euro, from pounds 0.6314 - the strongest it has been since the single currency's inception at the start of the year. It slipped against the dollar to $1.6125 from $1.6155 on Thursday. Measured in marks, the pound is at its highest since May 1989 - at about DM3.10.
"We can see [the pound] back up to a rate of DM3.20," said Roy Adams, fund manager at Old Mutual Asset Managers. Overseas investors may decide to have a side bet with sterling," he said. Three-month sterling lending offers a 260-basis point premium to the equivalent rates in euros.
Meanwhile, the pound may get a further boost from the hope that economic growth will accelerate in the coming months. This may prompt the Bank of England to raise benchmark borrowing costs from the current 5.5 per cent level.
"We've pencilled in February for the next hike of 25 basis points," said Mark Miller, UK economist at Morgan Stanley Dean Witter. The repurchase rate may rise as high as 7.25 per cent by the end of 2001 from 5.5 per cent now, he said.
In one indication that traders anticipate higher borrowing costs, rates on the March sterling interest-rate futures contracts rose 2 basis points to 6.29 per cent. That's far enough above current money market rates of 5.90 per cent to suggest that investors see the Bank of England driving interest rates higher by then.
House price reports this week from Halifax and Nationwide may give the pound further support if they show signs of accelerating inflation, boosting the case for higher borrowing costs, analysts said.
The yen surged to its highest level in almost four years against the dollar, and to a record high against the euro, on expectations that international investors will continue to pile into Japanese securities.
"The story continues to be market optimism fuelling capital flows into Japan," said Alex Beuzelin, a market analyst at Washington-based Ruesch International, which advises corporations on currency risk management. "That's really boosting a demand for yen."
On Friday the yen had its best day against the euro and the dollar for two and a half months: it rose to 102.35 per dollar and climbed 2.25 per cent to 103.90 per euro. It had earlier reached a record low of 102.06, compared with the Y132.8 level at which it started the year against the euro. That also equates with the mark's weakest rate in 30 years against the yen. Europe's single currency sank to $1.0166. It went as low as $1.0082, breaking the previous record low of $1.0108 on 13 July. At the start of the year the euro was set at $1.16675.
Helping trigger the euro's declines against the yen and dollar, European Central Bank officials suggested the bank won't buy the currency to try to bolster its value.Reuse content