Dollar sold broadly as bearish mood weighs on rates outlook

Exchange rate weakness in the face of a strong US dollar is a bigger concern for Asia than inflation, according to the managing director of DBS Bank in Singapore.
Zhang Peng | LightRocket | Getty Images

The British pound scaled eight-month highs above $1.34 on Tuesday as broad-based dollar weakness deepened in the wake of a new Federal Reserve policy framework that suggests U.S. interest rates will remain at record lows for the foreseeable future.

However, gains were capped amid deadlock in Brexit negotiations and ahead of a mid-week speech by Bank of England Governor Andrew Bailey, before the central bank's next monetary policy announcement on Sept. 17.

Prime Minister Boris Johnson said on Tuesday simple parts of Britain's future relationship with the European Union should be agreed first before more difficult areas of negotiations.

The pound strengthened 0.3% to $1.3415, its highest level since mid-December 2019, while it gained 0.3% against the euro to 89.03 pence.

"It's still a weaker dollar that is lifting cable," MUFG strategist Lee Hardman said.

Last week, Bailey said the Bank of England appears to get the most bang for its bond-buying bucks if it goes "big and fast" at times of crisis and it has plenty of ammunition to support the UK economy through its novel coronavirus shock.

Since becoming governor in March, Bailey has overseen a 300 billion-pound ($399 billion) expansion of the BoE's bond-buying programme - taking it to 745 billion pounds - and has cut its key interest rate to a record low 0.1%. The central bank is expected to expand its bond purchase plan in the autumn.

In a sign that the pound's gains have been driven by the dollar's weakness, the UK currency's performance versus the euro and the Japanese yen has been largely range-bound.

Reports about impending tax increases in the UK, to offset a surge in public spending during the pandemic, failed to check the pound's gains.

Media reports on Sunday suggested British Finance Minister Rishi Sunak was considering sweeping tax increases to ease public debt, which passed 2 trillion pounds ($2.7 trillion) after emergency spending amid the coronavirus pandemic.

MUFG's Hardman said the tax rises were for a later date.

"Right now would be a more risky proposition for the government to go down that route when the recovery is not yet on a solid foundation," he added.