Pound tumbles to lowest since March 2020 as dollar rally accelerates

LONDON (Reuters) -Sterling fell on Thursday and briefly hit its weakest since March 2020 below $1.18 as another bout of risk aversion sent investors buying dollars and dumping currencies deemed riskier when the outlook is so uncertain.

Sterling has fallen sharply in 2022 despite the Bank of England raising interest rates repeatedly. That’s because the jump in rates across the developed world has unnerved investors and sent them seeking safety in the U.S. currency, which tends to be the safe-haven of choice given its role in the global economy and how liquid it is.

A higher-than-expected reading of U.S. inflation on Wednesday fired up bets on a possible 100 basis points rate rise by the Federal Reserve this month, further rattling markets and supporting the dollar.

“The prospect of even more front-loaded Fed tightening should reinforce U.S. dollar strength in the near-term.” said Lee Hardman, an analyst at MUFG.

Traders also worry about the outlook for the UK economy, with concerns inflation in Britain could end up persistently higher than elsewhere even as economic growth grinds to a halt.

The pound fell as much as 1.1% to $1.1761, a new 27-month low after previously hitting one on Tuesday. Sterling later recovered and by 1515 GMT was at $1.1795

Against the euro, where the pound has fared much better in recent weeks, the British currency was down 0.2% at 84.77 pence.

The current leadership race to succeed Boris Johnson as prime minister and leader of the Conservative Party whittled down the candidates to five on Thursday, with more voting rounds among Conservative lawmakers scheduled for the coming days.

Uncertainty over who will win and the economic policies they will pursue has also cast a shadow over the pound.

But analysts say the strong dollar and the weak euro, which has been driven lower by concerns about soaring natural gas prices and their impact on the regional economy, matter more for the pound right now than the leadership race.

(Reporting by Tommy Reggiori Wilkes; Editing by Raissa Kasolowsky and Jonathan Oatis)