Sterling surges on US rates hint

Pound breaks through $1.80 for first time in 12 years; Fed member dismisses talk of dollar crisis

The dollar yesterday began the first week's trading of the new year as it ended the old one - plunging to a new record low against the euro, and falling to levels against sterling not seen in more than a decade.

The latest declines were spurred by the Federal Reserve governor Ben Bernanke, who dismissed talk of a dollar crisis and implied that US interest rates would remain low for the foreseeable future.

The risk of a currency crisis was "quite low", Mr Bernanke told a conference in San Diego, adding that given the scant threat of inflation, the current fed funds target rate of 1 per cent - a 40-year low in itself - were "quite appropriate".

For now, "I believe that the Federal Reserve has the luxury of being patient," he declared, reinforcing the market belief that the central bank's policy-setting Federal Open Market Committee, headed by the Federal Reserve chairman Alan Greenspan, will leave rates unchanged when it next meets on 27 and 28 January.

Traders thus took Mr Bernanke's words as a signal to sell - proof that the Bush administration is perfectly happy to see the dollar's decline continue, whatever the problems of financing a US current account deficit now running at upwards of $500bn a year, or 5 per cent of GDP.

"There's no hint that the dollar's fallen too far too fast," said James Pogoda, the vice president of precious metals at Mitsubishi International. "So keep pressing the same direction, I guess - dollar lower, gold higher."

With returns on US assets so low, gold yesterday shot up a further $6.40 to $422.50 an ounce for February delivery, its best level since early 1990, the last period of comparable dollar weakness. Other commodities followed the yellow metal higher.

The pound meanwhile jumped more than a cent to close in London at $1.8069, in part on expectations of higher UK interest rates. It is the first time since October 1992 sterling has closed above the psychologically important $1.80 mark.

The pound's surge eclipsed even that of the euro. The latter nonetheless rose to almost $1.27 before slipping back in New York trading to $1.2670, a record in the four-year existence of the single currency, and extending a 20 per cent increase against the dollar in 2003 alone.

The plunge in the dollar comes despite a host of economic indicators showing the US economy is growing much faster than its European and Japanese competitors, in a recovery that is finally creating new jobs as well.

Consumer confidence is growing rapidly, while a weekend survey by the US Institute for Supply Management showed new orders booked by industry rose in December at their best rate in 50 years.

With export prospects brightening with every fresh day the dollar weakens, economists here believe GDP will grow by 3.5 to 4 per cent in the first half of 2004, easily out performing the eurozone and Japan. Friday's US jobless figures are expected to show the economy created over 100,000 new jobs in December, with a possible fall in the headline unemployment rate from 5.9 per cent.

Political factors are also playing a big role. With the Presidential vote just 10 months away, the White House is unlikely to encourage any move to boost interest rates that would slow the economy, whose rebound will be a major theme of the Bush re-election campaign.

William Dudley, the chief US economist at Goldman Sachs in New York, said what comes out of the G7 meeting in early February will be important in setting the tone for the currency markets. "Our forecast for the dollar is 1.30 against the euro - which isn't that far away," he said. China's decision to peg its currency to a basket rather than the dollar could also be key, he said. "It is a wild card and it is important as it will affect the dollar's relationship with all Asian currencies."