LONDON: Sterling hit a three-month high against the dollar on Wednesday, on demand from US and Middle East investors, though dovish minutes from the Bank of England could see some short-term weakness.
The pound rose 0.2 percent to $1.6280 in early trade, towards its mid-September high of $1.6310. The euro fell 0.1 percent to 81.30 pence, edging off a two-month high of 81.55 pence hit on Monday.
Traders said US and Middle East investors bought sterling and sold the dollar in early trade. The dollar was under pressure as investors sold the greenback and bought assets and currencies linked to growth on expectations that US lawmakers will strike a deal on the budget.
"(Sterling/dollar) correlations are trading on a risk-on trade so it is hard to stop at this stage," said Geoffrey Yu, currency strategist at UBS, adding the pound would take some direction from developments in political wrangling over US budget problems.
Some analysts said sterling could lose a bit of ground if the Bank of England's minutes due at 0930 GMT showed a more dovish bias in line with comments from the bank's governor Mervyn King who said the UK will struggle to boost exports while the pound remains relatively strong.
"Maybe the BoE is moving away from more quantitative easing, especially if it is proven the Funding for Lending scheme is working but if anything risks are to the upside and we would see sterling higher," Yu said.
Some analysts said any discussion within the minutes on nominal GDP targeting would be examined as an indication of higher growth and inflation, though it was unlikely to be implemented in the near term.
"The plan (GDP targeting) runs the risk of generating more inflation while achieving little in the way of sustainable economic growth, which is a noxious combination as far as the pound is concerned," Commerzbank told clients in a morning note.
Investors will also keep an eye on distributive sales data due at 1100 GMT for signs in a pickup in UK growth in the fourth quarter, though little reaction is expected.
Center>Copyright Reuters, 2012
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