Sterling rallies to US$2 for first time in 15 years

With inflation also at a high, central bank may raise rate again this year


LONDON - THE British pound leapt to US$2 for the first time in 15 years as a report showed that inflation had unexpectedly quickened to a decade high, prompting traders to bet the Bank of England would raise interest rates twice more this year.

Sterling reached its strongest level since September 1992, when billionaire investor George Soros and other speculators drove the currency out of the European system of linked exchange rates.

Britain's economy, Europe's second-largest, has shown few signs of cooling following three rate increases since early August.

Another quarter-point move would take borrowing costs to 5.5 per cent, the highest among the Group of Seven major economies.

'The sky's the limit for sterling,' Mr Simon Derrick, chief currency strategist at the Bank of New York, said in London. 'It's a favourite for investors because of the rate differential.'

The pound rallied to as high as US$2.0037, and was trading at US$2.0024 as at 11.35am in London (6.35pm in Singapore) yesterday, up from US$1.9897 late on Monday.

Against the euro, the pound strengthened to 67.70 euro cents, from 68.02 cents. It rose to 238.55 yen, from 238.26.

Consumer-price inflation accelerated to 3.1 per cent last month, the national statistics office said yesterday, forcing Bank of England governor Mervyn King to write a mandatory letter of explanation to Chancellor Gordon Brown for the first time since the central bank was granted independence in 1997.

The bank must ensure price expectations are 'anchored' on its target rate of 2 per cent, Mr King wrote. The letter is required when inflation is more than a percentage point away from the bank's 2 per cent target.

The pound has risen 3.5 per cent against the greenback since the central bank last raised its key bank rate, to 5.25 per cent, on Jan 11.

The currency is being buoyed by the so-called carry trade, where investors buy British assets by borrowing in lower-yielding currencies such as the yen.

Higher rates on sterling-denominated assets prompted central banks to increase the pound holdings in their reserves last year. The pound surpassed the yen as the world's third-most-popular reserve currency, behind only the greenback and the euro, as central banks sought higher yields.

The pound's gain yesterday took it to its highest level since before the United Kingdom was forced to leave a system of pegging the country's currency to those of other European Union members.

Withdrawal from the so-called European exchange rate mechanism in 1992 caused the pound to tumble against the deutschemark, then Germany's currency, as well as the greenback.

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