Pound hits highest level since Black Wednesday

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The Independent Online

Sterling jumped to its highest level against the dollar in 14 years yesterday as the continued weakness in the US currency raised the chances of a two-dollar pound by Christmas.

The pound went past the two-year high of $1.9550 that traders had seen as a major obstacle to sterling hitting the landmark for the first time since the UK was ejected from the European exchange rate mechanism on Black Wednesday. It touched $1.97 briefly, according to HSBC, before retreating to $1.9626, up 0.8 per cent on the day.

"It's naked aggression in the capital markets," said David Bloom, global economist at HSBC. "We have had this low volatility and narrow trading ranges and suddenly everything has broken loose and people are trying to pin the tail on the donkey."

Sterling's rise was driven entirely by a fall in the dollar against all major currencies as speculation rose that the US would fail to achieve the so-called "soft landing". Yesterday fresh data pointed to continuing weakness in the world's largest economy. Business activity in the US Midwest contracted for the first time in three and a half years.

While a strong pound will be a boon for transatlantic shoppers, it will put pressure on companies that export to the US, which makes up 15 per cent of Britain's overseas goods sales.

The EEF, the manufacturing lobby group, said that so far few companies were reporting problems as their order books were already full. But Steve Radley, its chief economist, said: "If we saw a sustained rise in the pound above two dollars or world markets weakened, we'd expect to see a lot more companies suffering from the exchange rate."

Mervyn King, the Governor of the Bank, acknowledged that exporters to the US were having a tough time but stressed that the pound's average exchange rate with its main trading partners was broadly unchanged.

"The stability we've had in the economy as a whole has carried over to the stability of the average exchange rate," Mr King told MPs on the Treasury Select Committee. "This will be of particular concern to exporters to dollar areas who have found it much more difficult in the last six to 12 months."

The pound also benefited from hints by members of the Monetary Policy Committee who have not ruled out another rise in interest rates in the new year. Three members of the MPC - Charlie Bean, Tim Besley and Sir John Gieve - said they saw "upside" risks to inflation. "I think I see them as slightly on the upside both for output and inflation, partly because I think there are good reasons to expect investment to be strong and exports to be strong, and I don't see much evidence yet that the consumer is reining back," Sir John said.

However, this was offset by downbeat figures on the consumer economy. Household optimism fell last month in the wake of the November rate rise, according to GfK NOP.

The CBI said retail sales fell at their sharpest pace since March this month as unseasonably warm weather hit demand for winter lines.