The pound ceded gains against the dollar and fell against the euro on Wednesday after the Bank of England warned the UK economy faces a slow recovery.
In its quarterly Inflation Report, the Bank of England said the UK economy was “vulnerable to further shocks” and that inflation was not likely to meet its 2 per cent target until 2012.
Recent UK economic data, including Tuesday’s manufacturing and retail sales figures, had raised hopes that the economy was reaching the bottom of the recession. This helped boost the pound to a four-month high against the dollar on Tuesday as traders bet that the aggressive monetary policy action already undertaken by the Bank of England might help the UK economy to be among the first to emerge from the current downturn.
But the pound lost ground on Wednesday as Mervyn King, governor of the Bank of England, said it would be “extremely unwise” for anyone to claim that they know what the future held.
Mr King said there was a balance of risks: “There are pretty solid reasons for supposing that there will be a recovery next year, but also pretty solid reasons for questioning if that will be sustained.”
Rob Carnell at ING Financial Markets said the Bank of England was not buying the “it’s all over” mood that seemed to be sweeping over investors and market pundits. He said the report indicated that there would be no end to the current policy of credit easing any time.
By the close in New York, the pound eased 0.84 per cent to $1.5143 against the dollar, lost 0.39 per cent to £0.89718 against the euro and dropped 1.9 per cent to Y144.46 against the yen.
Elsewhere, the New Zealand dollar also underperformed after the Reserve Bank of New Zealand raised expectations for further cuts in interest rates.
The central bank, which last month lowered interest rates by 50 basis points to a record low of 3.5 per cent, said it was disappointed that banks had not passed on its rate cut to borrowers.
The New Zealand dollar dropped 2.56 per cent to $0.5904 against the US dollar.
Meanwhile, the dollar rebounded from a four-month trough against a basket of currencies as lower-than-expected US retail sales dented investor confidence and drove haven demand for the US currency. But it fell versus the Japanese yen to the lowest level since March.
The dollar index, which tracks its progress against a basket of six leading currencies, fell to a low of 81.87, its lowest level since January, before recovering to stand up 0.19 per cent at 82.49.
The dollar also rose 0.47 per cent to $1.3584 against the euro, climbed 0.19 per cent to SFr1.1077 against the Swiss franc. However, the dollar sold off against the yen to settle down 1.14 per cent to Y95.35 against the yen.
