LONDON (Reuters) - The pound climbed to a three-week high on Thursday as the dollar tumbled against its rivals after the Federal Reserve rolled out a $2.3 trillion effort to bolster local governments and small and mid-sized businesses in its latest move to support the U.S. economy.
The central bank’s announcement came as data showed that the number of Americans seeking unemployment benefits topped 6 million for the second straight week, with businesses closed across the country in an attempt to stem the spread of the coronavirus.
The pound, which was already stronger on the day, extended gains to hit a session high of $1.2481, up 0.8% on the day as risk appetite improved across the board following the dollar’s fall.
“The dollar is looking very vulnerable here in the short-term as the Fed has impressed and this could keep the pressure on the greenback,” said Edward Moya, a senior market analyst at OANDA based in New York.
News earlier that the Bank of England has agreed temporarily to lend money to the government to fight the spread of COVID-19 if funds cannot immediately be raised from debt markets had little impact on UK bond and currency markets.
While the government typically borrows money direct from the markets via bond issuance, its measures to increase spending to protect the economy potentially mean billions of dollars in extra borrowing at a time when bond markets have become volatile.
The BoE said any government borrowing from its Ways and Means facility would be repaid by the end of the year.
Andrew Mulliner, a portfolio manager at Janus Henderson Investors, said the BOE’s step is temporary in nature and solves the problem of raising a lot of cash very quickly via traditional debt management operations through a market that is accustomed to a steady flow of issuance.
“We see this step as more sensational at a headline level than any significant step into the sort of monetary financing that invites comparisons to Zimbabwe,” Mulliner said.
While the pound has generally held firm against the dollar in recent days, it has failed to break above the $1.25 line.
Domestic data offered little support. Gross domestic product rose by 0.1% in the December-February period, the Office for National Statistics said, weaker than a median forecast for growth of 0.2% in a Reuters poll of economists.
Versus the euro, the pound struggled to crack through the 87.50 pence level with some analysts remaining bearish about the British currency’s prospects against the euro as some European countries such as Austria and Denmark plan their exit strategies from a lockdown while the United Kingdom is planning on extending a similar shutdown.
“I think their actions are likely to improve sentiment towards the euro as investors realize that the first countries to take steps to deal with the virus will be the first ones to get back to some semblance of normality,” said Marshall Gittler, head of investment research at BDSwiss.
On a weekly basis, the British currency was poised for a gain of about 1%, aided by a broader drop in currency market volatility.
Expected swings in the British currency for one-month maturities dropped for a third consecutive week and held near a one-month low.
GRAPHIC: Net GBP bets -
Reporting by Saikat Chatterjee; editing by Angus MacSwan, Kirsten Donovan
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