The British pound rose to a six-month high against a stuttering dollar on Thursday, a day after the U.S. Treasury took a surprise measure to arrest a rise in long-term borrowing costs.
Sterling was up 0.4% against the dollar on Thursday at $1.3661, its highest level since February 16. The dollar index, which measures the currency against six peers including the pound, was down 0.2% at 98.61.
The U.S. Treasury announced it would at least double the size of buybacks of longer-dated Treasury securities, sending the 30-year yield sharply lower after it had risen to its highest since 2007 earlier in the week.
"A U.S. Treasury actively signalling that it is looking to cap long-term yields is bearish news for the U.S. dollar," said Louis-Vincent Gave, CEO at Gavekal Research.
"If U.S. long-term yields are indeed now capped, this sudden outperformance should continue since, if nothing else, the U.S. Treasury's move puts investors long the U.S. dollar on notice."
RISE IN INFLATION
Domestic matters have also supported the pound in recent weeks, including still elevated inflation which has investors pricing in higher borrowing costs from the Bank of England.
Annual inflation rose to a four-month high in July, data showed on Wednesday, although labour market data earlier in the week showed signs of a cooling employment picture.
"It's more of the same in terms of underwhelming growth, slightly uncomfortable inflation and a lacklustre employment market," said Jonathan Pryor, head of private markets & co-head of dealing at Marex FX.
"A lot of the numbers in the last week have fed into that. I think challenges remain and all that feeds back into the Bank of England and a very difficult balance between keeping an eye on inflation whilst manipulating rates to a point where they can entertain growth."
TIGHTENING EXPECTATIONS
Money-market traders still expect the BoE to raise borrowing costs once by the end of the year, while a second quarter-point rate rise is fully priced in by April next year.
ING global head of markets Chris Turner believes the pound could weaken against the euro ahead, expecting the central bank to keep interest rates on hold this year.
"We think euro-sterling will go higher towards the end of the year when Bank of England tightening expectations come out of the market," Turner said.
"But that doesn't look like it's going to happen for the next few weeks anyway so we think euro-sterling hangs around here."
The pound was little changed against the euro on Thursday at 85.78 pence.
