Pound at 7-week highs vs dollar as market awaits BoE minutes on Weds

LONDON - The pound reached seven-week highs against the dollar in late afternoon trade in London as the currency continued to benefit from expectations that the Bank of England will raise interest rates at least once more.

The central bank's surprise rate hike to 5.25 pct earlier this month, followed by last week's very strong inflation data have led the market to price in a further two rate hikes, with a back-to-back rise next month looking increasingly likely.

'Expectations of firm BoE policy in the months ahead continue to support the pound against the dollar and crosses,' said Jamie Coleman at Thomson IFR Markets, though he noted that the currency faces resistance ahead of the 1.98 usd mark.

The market will therefore be paying close attention to Wednesday's release of the minutes to the BoE Monetary Policy Committee meeting this month. Fourth quarter GDP figures on the same day are also expected to show consumer spending giving a sizeable boost to economic growth.

The pound reached a high of 1.9786 against the dollar this afternoon, approaching its highest level since early December last year, when it hit multi-year highs of 1.9850 usd. Against the euro, the pound also reached a two and a half year high as the single currency hit a low of 1.6542 stg.

Crucially, another quarter point rise in the Bank of England base rate would take UK interest rates back above the US Fed Funds rate for the first time since January last year.

Meanwhile, the yen remained weak across the board after last week's decision by the BoJ not to raise interest rates intensified speculation the central bank bowed to political pressure.

The dollar has risen further against the yen, reaching a day high of 121.79, its highest level since December, 2002, while the pound rose above the 240 yen mark for the first time since August, 1998.

An increasing conviction in the market that Japanese interest rates will remain low for some time has effectively given the green light for the carry trade -- when investors borrowing in low-yielding currencies in order to invest in higher yielding assets elsewhere -- to continue.

'With talk in the Kyodo news today that the BoJ will struggle to raise rates in the first quarter, it seems likely that this speculation will continue to rise and, with it, fresh downward pressure on the yen,' said Neil Mellor at the Bank of New York (nyse: BK - news - people ).

Tomorrow's publication of the minutes to the meeting is unlikely to alter sentiment either. Though the minutes are likely to mention the economy is slowly recovering, they are likely to note economic indicators, such as consumer spending and consumer prices, were weak.