NEW YORK LONDON, Sept 28 Reuters -- After tumbling earlier in the day, sterling rallied against the dollar on Wednesday after the Bank of England's BOE purchase of UK government bonds, letting some air out of the greenback's progress after it had touched a fresh 20 year high.
The BoE said it received 2.587 billion pounds' $2.78 billion worth of offers in its first bond buyback operation aimed at stabilizing the market, and had accepted only 1.025 billion pounds' worth. Between Wednesday and October 14th, the central bank had committed to buying several long-dated government bonds, known as gilts, as needed by the central bank.
As markets tried to digest what the move meant for the pound, the currency went up as high as $1.09165 and fell as low as $1.05390 during Wednesday's session. It was up 1.51% at $1.08921.
According to Erik Nelson, a macro strategist at Wells Fargo, the BoE intervention was driving currency trading broadly.
The yields were rising and the dollar was rising. It was sort of feeding on itself. We needed someone to stop the financial panic and financial stress that was happening. Nelson said the BoE stepped in there. The easing of the financial stress has helped sterling and other currencies rally against the dollar. The relief for sterling may be temporary, as the UK still has to deal with macro trends such as high inflation.
Nelson said that you're offering to limit the increase in yields at a time of high inflation. The dollar will go up over the next few months. The U.S. is growing at a much more solid pace compared to the UK and Europe, and the U.S. doesn't have the same energy crisis as the UK and Europe. According to Brad Bechtel, global head of FX at Jefferies, Russia's war against Ukraine and energy uncertainty in Europe have been monitored by investors after leaks on Nord Stream pipelines between Russia and Europe have spewed gas into the Baltic Sea. NATO Secretary-General Jens Stoltenberg and others have attributed the leaks to acts of sabotage.
The dollar index, which measures the dollar against a group of major currencies, was last at 112.660 after hitting a new 20 year high of 114.78.
The dollar initially had broad-based gains, but the dollar fell sharply as the U.S. trading session progressed, with the euro last up 1.52% at $0.9739 after falling as low as $0.95355.
The dollar was down 0.61% against Japan's yen at 143.955 after touching a high of 144.860.
The Australian dollar was up 1.410% last time, due to the swings in investor sentiment.
The offshore yuan hit a record low in Asia, pressured by expectations of further U.S. rate hikes.