The pound rose to the highest in 5 1/2 years against the dollar after the Federal Reserve said it would keep interest rates near zero while the U.K. is moving closer to raising borrowing costs.
U.K. government bonds erased gains as Bank of England policy maker Ian McCafferty said an early start to interest-rate increases may be warranted. BOE Governor Mark Carney said on June 12 that the first interest-rate increase “could happen sooner than markets currently expect.” Sterling has risen against all of its developed-country peers in the past month as investors pushed forward their expectations of when policy makers will raise the main interest rate.
“If it’s a choice between central banks that are keeping rates low for a very long period of time or a central bank that is actually relatively hawkish, I think it’s quite simple,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “Sterling is the one out of all the Group-of-seven currencies that’s got the opportunity to do something quite significant.”