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UK pound goes through $2 barrier UK pound goes through $2 barrier
(about 3 hours later)
The pound has moved through the $2 mark for the first time since 1992, as investors bet interest rates would have to rise to slow inflation.The pound has moved through the $2 mark for the first time since 1992, as investors bet interest rates would have to rise to slow inflation.
Consumer prices rose by 3.1% in March, the Office for National Statistics said. The ONS also said that its retail price inflation rate rose to 4.8%.Consumer prices rose by 3.1% in March, the Office for National Statistics said. The ONS also said that its retail price inflation rate rose to 4.8%.
Many economists consider an interest rate rise in May to be a certainty.Many economists consider an interest rate rise in May to be a certainty.
By late afternoon on Tuesday, one pound was worth $2.005, having been solidly above the $2 mark since late morning. By mid-evening on Tuesday, one pound was worth $2.007, having been solidly above the $2 mark since late morning.
The stronger pound has been good news for British visitors to the US, but has made life more difficult for exporters.The stronger pound has been good news for British visitors to the US, but has made life more difficult for exporters.
Moving upMoving up
The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992.The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992.
Analysts are now betting that the Bank of England will raise interest rates when it meets in May in an effort to slow consumer spending and price growth.Analysts are now betting that the Bank of England will raise interest rates when it meets in May in an effort to slow consumer spending and price growth.
For the first time, the Bank of England governor has had to write a letter explaining why inflation has climbed.For the first time, the Bank of England governor has had to write a letter explaining why inflation has climbed.
Borrowing costs have been increased three times since August.Borrowing costs have been increased three times since August.
Pound/dollar exchange ratePound/dollar exchange rate
The key rate currently stands at 5.25% and is widely expected to go up to 5.5% at the Bank of England's next meeting on 10 May.The key rate currently stands at 5.25% and is widely expected to go up to 5.5% at the Bank of England's next meeting on 10 May.
"A May move is a certainty," said Philip Shaw, economist at Investec."A May move is a certainty," said Philip Shaw, economist at Investec.
"It opens up a strong possibility of interest rates rising beyond 5.5%," he added."It opens up a strong possibility of interest rates rising beyond 5.5%," he added.
Higher borrowing costs act as a tax on consumers, boosting loan repayment costs, taking money out of their pockets and slowing the rate at which they spend and take on extra financing.Higher borrowing costs act as a tax on consumers, boosting loan repayment costs, taking money out of their pockets and slowing the rate at which they spend and take on extra financing.
Further fallsFurther falls
Analysts said that the outlook for sterling will also depend on US economic data due later on Tuesday.Analysts said that the outlook for sterling will also depend on US economic data due later on Tuesday.
British shoppers have been flocking to New York in recent monthsBritish shoppers have been flocking to New York in recent months
David Jones from CMC Markets said, "With US economic data due later in the session, further dollar downside may be seen in due course".David Jones from CMC Markets said, "With US economic data due later in the session, further dollar downside may be seen in due course".
It is not only sterling that is strong at the moment. The euro is at two-year high against the dollar and a record high versus the Japanese yen.It is not only sterling that is strong at the moment. The euro is at two-year high against the dollar and a record high versus the Japanese yen.
Many traders said they were surprised that last weekend's Group of Seven finance ministers meeting in Washington did not make any comments about the weakness of either the dollar or the yen.Many traders said they were surprised that last weekend's Group of Seven finance ministers meeting in Washington did not make any comments about the weakness of either the dollar or the yen.