Pound bolstered by deeper division at MPC

A recovery in the value of Asian dollars overnight and a revival in a view that the Bank of England will step away from its accommodative monetary stance have softened the appeal of the greenback. The euro has also risen to a two-week high as Chancellor Merkel prepares for a spectacular high-wire act balancing the needs of the Union against the will of her people.

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British pound – Minutes from the February monetary policy meeting have been defined as hawkish by the market. Both short interest rate futures and gilts have fallen and imply higher yields sooner rather than later in light of a defection to the other side of the table by none less than the Bank’s chief economist, Spencer Dale. The pound breached last week’s peak inspired at the time by a speech from committee-hawk Andrew Sentance. The pound rose against the dollar to reach $1.6275 at its best. Onlookers now believe that it can only be a matter of time before the economics chief manages to persuade the Bank’s aficionados that inflation must be addressed by raising interest rates. While the inflation profile has clearly worsened, with CPI running at 4% in January, the defection of Mr. Dale to the dark side of the room appears at odds with last week’s inflation report in which the Bank predicts that wayward inflation, like the prodigal son, will eventually see the light and return home. The Committee seemed to agree that the case for higher rates had grown in strength. Perhaps that’s what a 4% inflation rate and five open letters to the Chancellor does to a man.

U.S. Dollar – The dollar is weaker by 0.5% overnight and ahead of existing home sales data for January, which is expected to show a 1.1% decline in the annualized pace of sales to 5.22 million units. Investors drove up Asian dollars in response to a surge in the price of crude oil as violence in Libya worsens. The theory is that central bankers in the region will remain vigilant against imported energy costs that may filter through to push up inflation. Central bankers are already tightening the monetary belt in the area and another notch or two would only serve to boost the premium available to holders of those units thereby increasing their appeal.

Euro – ECB members Trichet and Guy Quaden address a meeting in Belgium later today. Onlookers will be listening closely to hear any response to the charge of yesterday from Yves Mersch that his colleagues are of the same conclusion that the central bank will likely have to respond through its monetary settings in light of clear threats to rising inflationary pressures. Reporters are also trying to second-guess the gamesmanship of German Chancellor Merkel who yesterday met with her Greek counterpart George Papandreou to discuss the equity of bailout terms for his nation. He says he’s committed to debt reduction but that the task would be an easier sell to his people if they can be convinced that their sacrifice is not in vain. If Merkel is to succeed in bolstering the euro she has to walk that tightrope between strengthening a permanent resolution for the bailout mechanism and convincing German taxpayers that the cost of rescuing profligate nations is better than a break-up of the Union. Progress towards a lasting resolution in the form of potential restructuring of Irish and Greek bailouts has lifted the single currency on Wednesday to $1.3743.

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