[ 2013-12-28 ]

Pound will be 'safe haven' currency of 2014, says Citigroup
- Sterling will be the global “safe haven”
currency of 2014 as Britain’s strengthening
economy makes it a magnet for inward investment,
according to Citgroup.

The pound, supported by a run of positive economic
data, climbed to a two-year high against the
dollar on Friday, rising to $1.6578.

"The UK economy is recovering faster than people
expected, and we think that continues next year,"
said Mark Schofield, head of macro research at
Citigroup.

Traders have pulled billions of pounds out of
emerging markets this year, where growth has
slowed, and ploughed it into sterling.

Mr Schofield said this trend was likely to
continue as concerns about political stability in
the US and worries over eurozone growth weigh on
the dollar and euro next year.

"People have been very bullish on dollars and been
wrong, and you've got a lot of US political issues
that are still worrying," he said.

"France is flirting with recession, and Europe has
a lot of concerns over its growth outlook ... so
it's very difficult to see where capital is going
to flow, other than sterling."

Citigroup predicts the pound will rise to $1.70
against the dollar by the end of next year, up 3pc
from its current level. It also believes sterling
will climb to €1.25 against the euro, from a
current level of €1.19.

Mr Schofield said the pound could even climb to
$1.80 against the dollar by the end of 2014.

"The $1.70 level would be the highest we've traded
for some time, certainly in the post-crisis
world," he said. "If it gets through that level,
technically there's not a lot stopping it from
going higher [especially if] you get clearer signs
of a long term structural recovery in the UK, or
an uptick in US political concerns."

However, a strong pound could hinder any chance of
a manufacturing-led, export-driven recovery in the
UK. Analysts said while the Bank of England has
attempted to "talk down" the pound in the past, it
was unlikely to take direct action.

"The UK doesn't have a great record at intervening
in the markets," said Kathleen Brooks, research
director at forex.com. "Black Wednesday 1992, when
the UK was forced to withdraw the pound from the
Exchange Rate Mechanism (ERM) after it was unable
to support it, is still quite a sore point.

"Any hint at intervention to weaken the currency
may also see hedge fund managers and the new
generation of George Soros's try to undermine any
attempts by the Bank to weaken the currency."

However, Mr Schofield said he was confident that
the Bank would carefully monitor Britain's
recovery.

"The Monetary Policy Committee will continue to
take a very cautious line," he said. "It's
unlikely they'll raise interest rates quickly or
aggressively. They'll want to make sure that the
recovery is sustainable before making a move."

Source - The Telegraph

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