British pound gains ground on remarks by BoE's Sentance
LONDON (MarketWatch) - The U.S. dollar was lower versus most major rivals in choppy trade Wednesday, while the British pound gained ground after a Bank of England official indicated it was time to consider putting monetary-stimulus measures on hold.
The dollar index (DXY 76.62, -0.34, -0.44%) slipped to 76.745 from 77.018 in North American trade late Tuesday. The index gauges the performance of the greenback against a trade-weighted basket of six major currencies.
The euro reversed early weakness in technically driven action to fetch $1.4574 versus the U.S. dollar, up from $1.4490 Tuesday. The dollar rose versus the Japanese currency to change hands at 91.16 yen, up from 90.99 yen late Tuesday.
The British pound rose 0.7% versus the U.S. unit to trade at $1.6283, while the euro slipped 0.2% against sterling to 89.46 pence.
Analysts said remarks by Andrew Sentance, a member of the Bank of England's Monetary Policy Committee, underpinned the currency.
In an interview with the Guardian published late Tuesday, Sentance said the 200 billion pounds ($324 billion) pumped into the U.K. economy through the bank's quantitative-easing program along with a cut in interest rates to a record low 0.5% and fiscal measures had helped the economy.
The bank is on track to complete the final 25 billion pounds of bond purchases under its asset-purchase program by the time the MPC meets again in February. The committee will have to decide at that time whether to extend the purchases.
"At some point you have to say we have increased the amount of stimulus enough," he said, according to the newspaper. "It doesn't mean you are going to withdraw it but you don't have to keep adding to it."
The bank is "approaching the point where we need to hold back and wait and see how that's flowing into the recovery," he said.
The remarks provided support but weren't a "shock," said Jane Foley, research director at Forex.com. The BoE had already slowed the pace of bond purchases at its November meeting, boosting expectations that the program would be put on pause in February, she said.
Meanwhile, the British economy is widely expected to show a return to growth in the fourth quarter of last year, but data continue to raise questions about the strength of the recovery.
November industrial-production data showed a 0.4% monthly rise, while manufacturing output was unchanged from the previous month.
The dollar initially got a lift against the euro Wednesday after data showed Germany's economy shrank more than expected in 2009, building on an earlier rise on a U.S. Federal Reserve official's hawkish rate remarks.
Germany's economy shrank in 2009 for the first time in six years, the Federal Statistical Office reported on Wednesday. Gross domestic product contracted 5% compared with the previous year, posting its biggest decline since the Second World War, according to official, preliminary data. Most economists expected a contraction of 4.8%.
In Asian trading, the greenback was boosted by remarks in a speech by Charles Plosser, president of the Federal Reserve Bank of Philadelphia, who said the U.S. central bank should begin to raise interest rates as the economy improves, and not wait for the unemployment rate to come down. Read Fed Plosser's remarks.
"This increase in rates must occur well before the unemployment rate or other measures of resource slack have diminished to acceptable levels," Plosser said. He will be a voting member of the Federal Open Market Committee in 2011, and participates in the discussions of all FOMC meetings.
Higher interest rates typically boost currencies because they boost the return on assets denominated in those currencies.
