Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh
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LONDON, Sept 28 (Reuters) - Sterling regained ground
against the dollar in volatile trading on Wednesday after the
Bank of England (BOE) said it would step in to calm the
turbulence in the UK government bond market.
The pound fell as much as 1.74% after the BOE's
announcement but clawed its way back into the green to stand
0.2% higher at $1.0737 in late London trading.
The euro was up 0.4% against the pound at 89.71
pence after paring earlier gains.
UK assets have tumbled in recent days after new Finance
Minister Kwasi Kwarteng on Friday announced a swathe of tax cuts
to be funded by borrowing. The pound, which is down more than
20% this year, dropped to a record low of $1.0327 on Monday.
Stress has been most apparent in government bond markets,
where prices have tumbled and yields have surged.
The BOE decided it had to step in on Wednesday, saying
it had seen "dysfunction" in the market for long-dated gilts and
that it would buy up to 65 billion pounds worth of assets to
rectify the situation.
Bond prices rallied sharply, with the yield on the
benchmark 30-year gilt falling more than a
Chris Turner, head of markets at ING, said a delayed
positive reaction to the BOE's intervention may have boosted the
"Given that the sell-off in gilts since early August had
been a big factor driving sterling weakness, todays
intervention will be welcomed by some," he said.
The pound was aided by a reversal in the dollar on
Wednesday, as US bond yields fell sharply along with those in
The dollar index was last down 0.42%. That undid
earlier gains which had seen the currency hit new 20-year highs.
Despite the recovery in the pound, Turner said many
investors will remain pessimistic and trading will stay febrile.
The BOE's move "effectively provides room for the government to
continue with its aggressive fiscal programme", he said.
The International Monetary Fund on Tuesday released a
statement saying "we do not recommend large and untargeted
fiscal packages" at the same time as monetary policy is being
used to tackle high inflation. It suggested the UK government
"reevaluate" its plans.
Ratings agency Moody's also weighed in on Tuesday, saying
the unfunded tax cuts were "credit negative" and likely to weigh
Strategists at Barclays cautioned that any respite for the
pound might not last long, with storm clouds still hanging over
the UK economy.
"The currency is likely to be the easiest 'release
valve' as investors come to terms with recent policy actions,"
they said in a note to clients on Wednesday.
(Reporting by Harry Robertson; Editing by Amanda Cooper, Frank
Jack Daniel, Catherine Evans and Ed Osmond)