Shares in London followed suit, though figures showing a big jump in the trade deficit confirmed that the strong pound has started to damage exports.
The reason for the markets' jubilation was news of a lower-than-expected rise of 0.8 per cent in the US employment cost index in December, a figure upon which analysts had decided the Federal Reserve's next interest rate decision hinged.
At the same time, there were more signs that the US economy remains buoyant. The index of consumer confidence published by the Conference Board jumped to its highest level so far this decade.
The employment cost index showed that total compensation - wages plus benefits - rose by a modest 2.9 per cent last year despite strong growth in employment and an increase in the minimum wage. The wages component climbed by 3.3 per cent in 1996.
Although these were the highest figures since 1991, they were more benign in terms of inflationary worries than hourly earnings, whose growth is currently approaching 4 per cent a year. "This has made it easier for Alan Greenspan to resist the siren voices calling for higher interest rates," said Ian Shepherdson, an economist at HSBC Markets in New York.
A majority of analysts think the Fed chairman will not push for an increase in rates when the Open Markets Committee meets to discuss monetary policy next week. Many predict interest rates will stay flat until the second half of the year.
Yesterday's trade figures for the UK were not thought to have any new implications for Kenneth Clarke's decision on interest rates when he meets Eddie George, Governor of the Bank of England, a week today. Most City economists reckon the Chancellor will leave rates unchanged.
The trade deficit with the EU widened slightly to pounds 260m in November, taking the total deficit from pounds 680m the previous month to pounds 959m. The non- EU deficit surged to pounds 844m in December from pounds 639m in November.
This deterioration was even faster than many economists had feared. Lower export prices and volumes outweighed the favourable impact of lower import prices last month.
The pound's index against a range of other currencies fell by 0.1 to 95.3 yesterday.Reuse content