Sterling index hits near six-year high, led by gains vs euro

LONDON Thu Jul 3, 2014 4:33pm BST

1 of 2. Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013.

Credit: Reuters/Leonhard Foeger

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LONDON (Reuters) - Sterling hit its highest against a basket of currencies since October 2008 on Thursday, led by gains against the euro after comments from the ECB chief highlighted the diverging outlooks for interest rates.

Britain stood out among the major economies as clearly on track for a rate hike next year, after European Central Bank President Mario Draghi said euro interest rates would be kept at their record lows for the foreseeable future and that money-printing was still possible.

Earlier on Thursday, Sweden's Riksbank became the latest central bank to slash interest rates to almost zero in a bid to push consumer prices closer to the key inflation target. In mid-June Norway's central bank lowered its interest rate outlook.

"What’s becoming increasingly obvious to many investors is the divergence between what’s being hinted at by the Bank of England, which is the next policy move will be a hike, and the ECB, which is reassuring us that interest rates there are going to remain very low for a prolonged period of time," said Jane Foley, a London-based currency strategist at Rabobank.

Sterling rose by around a quarter against the single currency, hitting a 19-month high of 79.335 pence per euro after Draghi's comments. Against a trade-weighted basket of currencies, the pound rose to 88.9 - its highest in almost six years.

The pound hit a session low of $1.7092 following unexpectedly good U.S. jobs data. It later bounced back to trade at $1.7143, within touching distance of a six-year high of $1.7180 hit on the previous day.

U.S. nonfarm payrolls increased by 288,000 jobs over the past month, far outstripping the 212,000 jobs forecast by economists in a Reuters poll. That pushed up the dollar against almost all major currencies.

MISSING DOLLAR RECOVERY

Considering the strength of U.S. jobs data over the past months, some traders said the failure of the dollar to stage the recovery that many have been expecting since the start of this year was a sign that investors felt the U.S. Federal Reserve had no appetite for hiking rates in the near future.

"The fact that it moved so little on such a strong payrolls release I think is a remarkable feature, and this of course comes back to the rhetoric from (Fed Chair) Yellen, where again we’re being told that it’s appropriate for rates to remain low for a prolonged period from the U.S. too," Foley said.

Slightly lower than expected PMI numbers from the UK's dominant services sector earlier showed the main headline index of sentiment dipping to 57.7 points from a forecast 58.3.

That still left it far above the 50 mark that separates expansion from contraction.

"The services numbers were a little bit lower and the whisper number in markets had also probably been a bit higher than the consensus forecast, so we have come off a touch," said Paul Robson, a currency strategist with RBS in London.

"But the story is still chiefly one of higher yields and that is what the pound provides just now. If the higher frequency data continues to outperform, there is no reason to expect sterling to stop here."

Gilt futures pared losses after the PMI data the stronger-than-expected U.S. jobs report then knocked them to their lowest in over two weeks. Gilt futures were 31 ticks lower on the day at 108.91 at 1333 GMT(02.33 p.m. BST), having fallen as far as 108.73 after the U.S. data.

The 10-year British/German bond yield spread was little changed on the day at 146.6 basis points, having risen as far as 147.6 in the previous session - its highest since 1997.

(Additional reporting by Ana Nicolaci da Costa and Patrick Graham; Editing by Tom Heneghan)

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