Narrowing in trade deficit cheers pound

The pound ended a three-day losing streak yesterday after official figures showed an unexpected narrowing in the UK's balance of payments deficit in the fourth quarter.

The pound ended a three-day losing streak yesterday after official figures showed an unexpected narrowing in the UK's balance of payments deficit in the fourth quarter.

Sterling rose strongly against the dollar on the news that the current account deficit fell to £5.3bn from a revised figure of £6.3bn for the third quarter. The pound gained half a cent on the US currency to $1.8236 and also rose against the euro.

On Thursday, sterling lost 2.5 cents against the dollar after the Governor of the Bank of England, Mervyn King, told MPs that the strong currency was making life hard for exporters and hindering balanced growth.

Stephen Nickell, another member of the Bank's Monetary Policy Committee, said yesterday that it would need to take more account of sterling if the currency remained strong - a hint that interest rates may be able to stay on hold for longer.

Mr Nickell stressed that he was not making any forecasts about the exchange rate but added: "If sterling stays strong month after month you take account of it."

The decrease in the deficit for the last three months of the year was the result of a surplus of £5.9bn on investment income from earnings abroad which more than offset a widening in the trade deficit. For the year as a whole, the deficit totalled £18.76bn against £17.81bn in 2002 and £23.5bn the year before that. Analysts said that the current account figures would ease downward pressure on sterling.

Separately, the Office for National Statistics kept its estimate of UK growth in the fourth quarter at an unrevised 0.9 per cent - the best economic performance for almost four years. However, it trimmed its estimate of year-on-year growth from 2.3 per cent to 2.2 per cent.