Monday, July 10, 2006

The Pound passes the Yen as a Reserve Currency, showing International Endorsement of the British Economy and the Labour Government

This is an excerpt from an article in Bloomberg:

July 10 (Bloomberg) -- Central banks from Oman to the Ukraine are increasing their holdings of British pounds, contributing to the currency's biggest first-half gain against the dollar in 16 years.

National banks boosted holdings of pounds to $115 billion, or 4 percent of total reserves at the end of March, the most since the International Monetary Fund began publishing data in 1999. The increase is helping Britain's economy by holding down government bond yields.

..........The pound's share of reserves has risen from 3.7 percent at the start of last year and 2.7 percent in March 2004. Britain's currency surpassed the yen in December as the third-most popular after the dollar, which makes up 66.3 percent and the euro, at 24.8 percent. The IMF includes data from 114 countries that hold $4.4 trillion worth of foreign currencies.

........Demand for pounds is being propelled from central banks, mainly in developing countries.

The pound is attractive in part because of Prime Minister Tony Blair's success in slowing inflation and spurring growth. Consumer price gains have averaged 1.4 percent since May 1997, when Blair took office. The inflation rate averaged 4 percent in the five previous years. Economic growth of 2.3 percent in the first quarter was faster than the average for the 12 nations sharing the euro.

Central-bank purchases of the pound reduced 10-year U.K. bond yields by as much as 150 basis points from June 2004 through the end of last year, said Gertjan Vlieghe, an economist at Deutsche Bank who worked at the Bank of England for seven years. ``We have seen a big increase in central bank buying of sterling, and those purchases have helped keep yields low.''
U.K. 10-year bond yields fell to 4.64 percent last week from 4.70 percent the week before. In the U.S., 10-year Treasury notes yield 5.13 percent

This is good news - a strong pound keeps the cost of imports low, and hence supresses inflation, and therefore interest rates. It's also a sign of international recognition of how well Britain has done since Labour came to power.

No comments: