LONDON (AFP) — The pound along with the dollar got a boost Thursday as the Bank of England and the US Federal Reserve sought to put some distance between their support for mortgage and credit markets from monetary policy.
The move in turn allowed them to sound more hawkish on inflation.
The BoE is finalising a plan that would see it accepting mortgage-backed assets in exchange for Treasury gilts in order to kick-start interbank lending back to life, a measure adopted earlier by the Fed.
This program is allowing rate-setters to 'de-couple' their monetary policy from their support for financial markets and mortgage lending.
"There is a different strategy being used which is to differentiate calming mortgage markets from monetary policy," said Hans Redeker, head of forex strategy at BNP Paribas.
He said comments from Fed members Richard Fischer and Jeffrey Lacker overnight have been relatively more hawkish considering the soft U.S. data this week, while BoE chief economist Charlie Bean on Thursday night stressed the dangers of inflation.
"I am reasonably sanguine about the implications of any fall in house prices for consumer spending," Bean said, suggesting the falls in property values are unlikely to push him to vote for another rate cut next month.
The view that the BoE, like the Fed before it, will act directly in financial markets to improve interbank lending and mortgage funding has caused bond yields to rise sharply in the US and United Kingdom this week, making these currencies more valuable.
Redeker said that the reallocation of reserves in to the euro made by central banks over the past few weeks had not been happening Friday, which was causing a sharp unwinding of the single currency's rally in favour of the dollar and pound.
The euro has been supported by fundamentals as well -- with price indicators hitting new record levels this week -- and has prompted speculation of an intervention to limit its rally.
Eurogroup chairman Jean-Claude Juncker on Thursday said markets had not heeded the warnings in the Group of Seven's communique, which said that an excessive rise in the euro was not desirable.
But the chances of an intervention are slim, experts believe, so long as the European Central Bank remains worried about inflation and uses hawkish rhetoric.
"Today's fall in the euro is not about intervention, this is a dollar and pound story," said Redeker at BNP Paribas.
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