LONDON: The British pound dropped half a percent against the dollar on Wednesday as a further surge in energy prices and government bond yields sent investors into safer currencies.

Sterling hit as low as $1.3559 and was 0.1% weaker versus the euro at 85.18 pence.

The US dollar, measured against a basket of currencies, is close to its strongest level in more than a year.

The jump in oil and gas prices has heightened fears of a spike in inflation, pushing government bond yields higher as investors bet central banks will be forced to raise interest rates to curb prices rises.

Sterling hits 3-week high versus euro, recovering from sharp sell-off

Gilt yields have surged, with the 2-year yield rising to as high as 0.518%, its highest since February 2020.

British wholesale gas prices soared to record highs in several contracts on Tuesday amid wider energy market price hikes, ongoing supply concerns, colder weather forecasts and a cut in French nuclear generation due to a strike.

Analysts, however, said the pound was holding up relatively well in the recent global sell-off in riskier assets, as rising expectations for Bank of England (BoE) rate rises offset the nervousness about the energy price jump.

"Higher energy prices are directly feeding into BoE tightening expectations and supporting the pound. Even though that tightening may ultimately be a policy mistake it looks far too early for that to hit GBP," said ING analysts in a research note.

"Indeed, flat or inverted yield curves are generally positive for currencies and the currency sell-off only materialises once the tightening is ready to be reversed."

Traders now await US jobs data - due at 1215 GMT - for clues on the timing of Federal Reserve policy tightening.