- Dollar weakness lifts sterling
- Trump signals watched closely
- Rates outlook steadies nerves
The pound climbed to its highest level against the dollar in nearly five years on Tuesday, as investors grew uneasy about the US currency and took fresh interest in Britain’s post-Budget outlook.
Sterling rose about 0.8 per cent, with £1 buying close to $1.38, its strongest level since late 2021. Over the past year, the pound has gained more than 10 per cent against the US dollar, helped largely by a broad sell-off in the greenback.
Much of the move was driven by weakness in the dollar rather than a sudden surge of confidence in the UK. The dollar index, which tracks the US currency against six major peers, fell around 0.9 per cent on Tuesday and is down almost 11 per cent since January last year.
The index slipped to a four-year low after US President Donald Trump responded positively when asked whether the dollar had fallen too far, comments that markets interpreted as signalling a preference for a weaker currency.
Gold prices jumped in the same session, hitting a record high of about £4,115 an ounce ($5,267), as investors moved away from the dollar. Later in the day, gold was still up around 1.6 per cent at roughly £3,970 an ounce ($5,088). The metal has risen about 84 per cent over the past year, putting it on course for its strongest annual performance since 1979.
Traders have been cutting dollar positions since Trump flagged the possibility of tariffs on Western allies linked to Greenland. Although those threats were later withdrawn following talks with NATO leaders, the details of any understanding remain unclear. Trump also announced a 25 per cent tariff on South Korean imports on his Truth Social platform, reportedly citing non-compliance with a previous trade agreement.
UK outlook and rates in the mix
Analysts at Dutch bank ING said the pound’s recent strength may partly reflect asset managers unwinding short positions that became risky as the dollar weakened, as quoted in a news report.
There are also signs of growing interest in the UK after recent Budget measures. Data released since then point to an uptick in economic activity, and traders are increasingly betting that the Bank of England will keep interest rates unchanged at its next meeting. December inflation rose to 3.4 per cent, a factor some investors see as limiting the scope for near-term rate cuts.
Against the euro, however, the pound was slightly weaker on Tuesday, trading near €1.14, down more than 3 per cent over the past year. The euro itself touched its highest level against the dollar since June 2021.
In the US, attention is also on the Federal Reserve, with markets expecting rates to remain steady at 3.5 per cent to 3.75 per cent after the upcoming meeting of the Federal Open Market Committee. Fed chair Jerome Powell is nearing the end of his term in May, and Trump is expected to name a successor soon. Rick Rieder of BlackRock is being mentioned as a leading contender, according to market speculation.
Meanwhile, the yield on the benchmark 10-year US Treasury note was little changed on Tuesday at around 4.2 per cent, suggesting bond markets are taking a wait-and-see approach as currency volatility plays out.
