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Sterling hits near 6-month high against softer dollar

Thu, 14th May 2015 08:53

LONDON, May 14 (Reuters) - Sterling rose to its highest in nearly six months against a weaker dollar on Thursday, buoyed by comments from Bank of England chief Mark Carney who said it was possible interest rates would be higher in a year's time.

Asked in a BBC radio interview if interest rates were likely to be higher by this time next year, Carney said: "It's possible, but it depends on the evolution of the economy."

He also said recent sterling strength could be a bit of a dampener to growth, echoing comments made on Wednesday when he said a strong currency would have a role to play in setting monetary policy.

The UK economy has outpaced much of Europe over the past two years, and the prospect that Britain will be the first to follow any rise in U.S. rates has underpinned sterling.

The dollar, though, has come under pressure in the past few weeks, hurt by concerns that the U.S. economy has been suffering from more than a winter chill. Retail sales data for April disappointed on Wednesday and added to a view that the Federal Reserve was unlikely to raise rates in a hurry.

Sterling rose to $1.5789 in early London trade, its highest since late November, and up 0.3 percent on the day. It underperformed the euro, however, which rose 0.2 percent to 72.25 pence.

"There is technical resistance at $1.58, but UK importers, who are mainly buyers of dollars, are liking these levels," Alex Lydall, senior sales trader, at Foenix Partners, a firm which manages hedging mandates for British corporates.

"What Carney is indicating is that rate hikes will be very gradual and that does not come across as a surprise. But sometimes the market just needs an excuse."

Sterling hit a 7-year high against a trade-weighted basket of currencies on Wednesday on strong wages and jobs data, but was knocked back after the BoE cut its growth forecasts and warned about a strong pound's impact on the outlook for interest rates.

Commerzbank said in a note that the downgrades to productivity forecasts indicate the BoE will not be comfortable with the currency's appreciation over the longer term.

"Indeed, if the forecasts manifest then further sterling appreciation would not be justified at all. We remain of the view that euro/sterling will trade at lower levels over the medium term more so as a function of euro weakness," they said. (Reporting by Anirban Nag; editing by John Stonestreet)

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