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FX round-up: Rising inflation boosts sterling

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Date: Wednesday 19 Mar 2008

LONDON (ShareCast) - The pound rallied against the dollar Tuesday after a report showed UK inflation rose at its fastest pace in nine months in February, while a big cut in US interest rates helped the dollar elsewhere.

A report from the Office for National Statistics showed annual CPI inflation running at 2.5% last month, more than the 2.2% seen in January, as energy companies increased gas and electricity prices.

It was the fifth month in a row that inflation has been above the government’s 2% target, which gives the Bank of England a headache as it looks to cut interest rates but avoid fuelling inflation.

The ONS attributed the increase to changes in the basket of goods used to calculate data and the reflection of energy bill hikes in full this month rather than spread over four months, as before.

Meanwhile, the US currency advanced the most in nine years versus the yen and strengthened against the euro after the Federal Reserve cut interest rates by three quarters of a percent to 2.25%.

Traders said the move is good for riskier assets as it lessens the chances of further failures in the financial system, while others noted that the drop was short of the 1% cut many had expected.

But the greenback fell back overnight as the market assessed the Fed’s decision and bet that policymakers have not finished with their rate cut programme.

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