LONDON: Sterling fell from a more than six-year high against a currency basket on Tuesday, dragged down by losses against the dollar, after Federal Reserve chair Janet Yellen seemed to lay the ground for an interest rate hike in coming months.
The dollar rose after Yellen told a congressional committee that the Fed is preparing to consider rate hikes "on a meeting-by-meeting basis". That represented a subtle change of emphasis in how the Fed has been speaking about its plans for the first rate hike since 2006.
"The initial reaction is dollar-positive as it seems Yellen is preparing the groundwork for a rate increase," said a spot trader. U.S. short-term interest-rate futures contracts indicated a 56 percent chance that the first Fed rate hike will come in September 2015, up from 54 percent.
Sterling fell to $1.5415 immediately after Yellen's comments from around $1.5432 beforehand, leaving it 0.3 percent lower on the day. It was also weaker against the euro, having hit a seven-year high of 73.17 pence per euro It was last trading at 73.45 pence, down around 0.1 percent on the day.
Earlier, the sterling trade-weighted index rise to 91.1, its highest in over six years. Those gains came after a Bank of England policymaker said British interest rates could rise soon if inflationary pressures pick up quickly.
Kristin Forbes said in a speech the risks from a return of inflation, asset price bubbles in the financial sector and levels of consumption and savings were "moderate and manageable" at the moment. But these needed "close attention."
Her comments came just before BoE Governor Mark Carney and some of his colleagues testified before parliament's Treasury Committee. Carney told lawmakers the BoE was aiming to bring inflation back to its 2 percent target within two years.
Another policymaker, Martin Weale, said it may be appropriate to start raising interest rates rather earlier than financial markets currently anticipate. But his colleague in the nine-member committee David Miles said the central bank should not be in a hurry to raise rates or normalise policy.
"Weale did speak about wage pressures, but with inflation expected to remain muted in the short term, there hasn't been much change in rate hike expectations," said John Hardy, head of currency strategy at Saxo Bank.
Recent upbeat economic data, along with Carney's comments two weeks ago that rates in UK were probably going to rise rather than fall, have led to a steadying of rate hike expectations after they were pushed back by more than a year.
Investors are pricing in the chance of the first rate hike by the BoE in early 2016.
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