FOREX-Sterling up on hints of 2015 rate hike as euro slips

Wed Feb 12, 2014 3:43pm EST

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By Michael Connor

NEW YORK, Feb 12 (Reuters) - The British pound moved up to a two-week high against the dollar on Wednesday after the Bank of England hiked economic growth forecasts and hinted Britain may raise interest rates next year.

Prospects of a rate hike in the second half of 2015 also prompted investors to buy sterling against currencies like the euro, the yen and the Swiss franc .

"It's a sterling day," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

But the dollar also rose broadly, in part because new Federal Reserve Chair Janet Yellen on Tuesday showed no sign in congressional testimony of slowing a wind-up of a massive bond-buying stimulus program now running at $65 billion monthly.

"It made it seem like the Fed is no longer data dependent on tapering," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York. "The market had been hoping she might be more dovish."

Steady cuts in the Fed's quantitative easing campaign, like the two $10 billion reductions already taken, suggest increases in U.S. interest rates are likely to be sooner rather than later, Borthwick said. Higher U.S. rates would lift demand for dollars.

The euro fell more than 1 percent against sterling and was softer against the dollar, in part because of Yellen's testimony, Borthwick said.

Sterling jumped to a two-week high of $1.6587, up 0.8 percent on the day, and well above the $1.6480 registered before the BoE said interest rates could start rising from record lows in little more than a year.

"The BoE seems to become the first major central bank, bar the Reserve Bank of New Zealand, to hike interest rates," said Chris Turner, chief currency strategist at ING. "We are expecting a rate hike in February 2015, so in the short term sterling looks good, especially against the euro."

Against the dollar, the euro was down 0.33 percent at $1.3592 ; against the yen, it was down 0.50 percent at 139.245 yen.

The euro was also hurt by weak economic data and comments from ECB Executive Board member Benoit Coeure, who told a Reuters Summit the bank was "very seriously" considering a negative deposit rate. The rate, at which banks park surplus funds with the central bank, is now zero percent.

Industrial output for the euro zone in December fell 0.7 percent on the month, after a downwardly revised 1.6 percent rise in November and much sharper than a 0.3 percent fall forecast..

The euro's losses helped lift the dollar index 0.06 percent to 80.699, pushing it above a two-week low of 80.448 after being as high as 80.831.

Earlier, the Australia and New Zealand dollars hit one-month highs as improved Chinese trade data eased concerns about growth in the world's second-biggest economy and bolstered demand for riskier assets.

China's trade performance beat forecasts in January as import growth hit a six-month high, which soothed recent fears that the world's second-largest economy is slowing down. China is Australia's biggest export market.

The Aussie dollar hit a high of $0.9068, its strongest level since Jan. 13, before easing to trade at $0.9039, flat on the day.

The New Zealand dollar also retreated in late trade after hitting a one-month high of $0.8370 and stood nearly unchanged for the day at $0.8320 in New York.

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