By Peter Garnham
Published: December 23 2009 11:26 | Last updated: December 23 2009 11:26
The pound dropped to a fresh two-month low against the dollar on Wednesday after the minutes of the Bank of England’s monetary policy committee showed all nine members voted to keep interest rates a record low levels and maintain asset purchasing target.
The MPC said it was difficult to identify with any degree of certainty whether the economy had turned, adding that events in Dubai and Greece were a reminder of the shocks that might impact the UK.
Analysts said the somewhat cautious tone from the Bank played to reports in the UK press that the central bank was planning to do more quantitative easing (QE) next year, expanding its asset purchase programme by $25bn.
Divyang Shah at IFR Markets said it was clear that the outlook for further QE would not be decided until February.
“We continue to believe that the Bank of England will deliver further QE but in terms of timing, as long as there are no further shocks, this extension is more likely during the third quarter after the peak in inflation has been confirmed and the UK election is over,” he said.
The pound fell to a low of $1.5921 against the dollar, its weakest level since October 14, before paring some of its losses to stand down 0.1 per cent at $1.5957.
The pound also eased 0.1 per cent to £0.8929 against the euro and lost 0.1 per cent to Y146.51 against the yen.
Meanwhile, the dollar consolidated its gains after hitting its highest level in nearly four months on a trade-weighted basis on Tuesday after a sharp jump in US home sales fuelled expectations that the Federal Reserve would exit from its ultra-loose monetary policy stance sooner than expected.
Amid holiday-thinned trade across global markets, the dollar index, which tracks its progress against a basket of six major currencies, edged 0.1 per cent higher to 77.289 on Wednesday.
The dollar was also little changed at $91.81 against the yen and flat at $1.4247 against the euro.
The dollar did lose ground against the Swiss franc, however, easing 0.2 per cent to SFr1.0464 as traders continued to test the Swiss National Bank’s tolerance towards a stronger currency.
After breaking through the SFr1.50 against the euro at the end of last week, a level which the Swiss National Bank had been defending since March in its fight against inflation, investors have been pushing the Swiss franc steadily higher in an attempt to provoke a reaction from the central bank.
Jane Foley at Forex.com said traders were “playing chicken” with the SNB.
“Signs that the Swiss economy continues to improve has strengthened the notion that the SNB will allow the Swiss franc to appreciate versus the euro.” she said.
“However, no one has the confidence to expect that the SNB will step away from the market completely.”
The Swiss franc rose 0.2 per cent to SFr1.4918 against the euro.
