Pound starts to regain lost ground

Sterling was among the best performers this week, rallying against all other leading currencies after strong showings on UK equity markets by financial stocks.

Boosted by renewed appetite for risk, the pound gained 1 per cent against the dollar over the week to $1.4810 after briefly climbing above the $1.50 level mid-week. Against the yen, sterling rose 0.2 per cent to Y147.19 and versus the euro, it climbed 2 per cent to £0.8805.

Stronger-than-expected results from Goldman Sachs and JPMorgan Chase helped Britain’s financial stocks rally strongly, in spite of more mixed results from Citigroup on Friday. The FTSE 100’s banking index rose 5 per cent over the week.

The rally in financials mirrored a broader increase in risk appetite, which helped drive most equity indices higher. “Stock markets have rallied amid growing confidence that the financial sector might have passed the worst,” said Alex Dunn at CaxtonFX. “As a result the appetite for safe havens such as the dollar has diminished and there is more demand for riskier currencies such as sterling.”

By contrast, the euro was on the back foot. It fell 2 per cent against the yen this week to Y129.46 and by 1 per cent to $1.3054 against the dollar after hitting a one-month low of $1.3030.

Falling inflation and sharply reduced inflation expectations have left many believing the European Central Bank will announce a further quarter-point rate cut on May 7 and possibly additional measures to boost economic activity.

This was certainly the impression given by Axel Weber, a member of the ECB governing council, on Tuesday. ECB president Jean-Claude Trichet was more measured yesterday, saying the bank would wait until the meeting to decide on “non-standard” measures.

Concerns about the health of the eurozone were compounded when Moody’s, the ratings agency, said on Friday it may cut Ireland’s sovereign debt rating given the “severe economic adjustment” taking place there.

Gains for the dollar during the final two sessions of the week were partly driven by weak data on Thursday that showed slowing Chinese growth, tumbling eurozone production and a 10 per cent fall in new US home builds in March.

Although equity markets remained propped up by the earnings reports in the bank sector, the dollar also won support as some analysts suggested the recent pattern in risk strategy was beginning to unwind.

During the equity sell-off prior to March’s recovery the dollar benefited from its perceived safety as a reserve currency. However, in recent weeks investors have regained an appetite for risk, prompting a bounce in equity markets and a retreat for the dollar as the search for yield has brought about a revival of the carry trade.

But on Friday, equity markets and the dollar moved higher in tandem. “There is now a divergence taking place between equity market performance and foreign exchange,” said Hans Redeker at BNP Paribas.

“Even with equities trading higher, the dollar has made gains, albeit modest. Currency investors are trading currencies on a selective basis.”

Although the dollar was weaker over the week, it rallied 0.8 per cent against the pound on Friday. Over the week, the dollar was 0.9 per cent stronger against the Swiss franc at SFr1.1652, but fell 0.8 per cent against the yen to Y99.35.