US Dollar Hits Two-Week High, Pound Slumps After BoE Holds Rates

US Dollar Reaches Two-Week Peak as Pound Declines Following BoE Decision

Market Reactions to Currency Fluctuations

By Laura Matthews

Impact of BoE's Rate Decision

NEW YORK, Feb 5 (Reuters) - The U.S. dollar hit a two-week high on Thursday as fresh volatility gripped stocks and the pound tumbled after the Bank of England voted by a razor-thin margin to leave UK rates unchanged.

Federal Reserve's Stance on Interest Rates

The greenback found firmer footing this week as investors turned more risk-averse and financial markets assessed results so far in the U.S. corporate earnings season, now halfway complete.

Market Volatility and Economic Indicators

The dollar largely stayed range-bound after a run of softer U.S. labor data, including jobless claims rising more than expected and unexpectedly low job openings in December. 

"Now the issue is, to me, whether we go broadly sideways or is there a deeper dollar bounce in store for us," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"Because inflation is still a bit elevated and the economy is still solid, it seems to me that the Federal Reserve is not in a hurry to cut rates again, and that sets us up for when Warsh takes over."

Chandler added that markets expect softer data once Kevin Warsh, nominated as the next Federal Reserve chair, takes up his post. However, his confirmation may face hurdles, with some Republicans saying they will not proceed until an inquiry into current Fed Chair Jerome Powell is resolved.

The dollar index, which measures the U.S. currency against a basket of six others, was last up 0.18% at 97.85, rising for a second day. It rose to its highest since January 23 earlier in the session.

Gold and silver, which have become more volatile as a result of leveraged buying and speculative flows, were rocked by a fresh selloff on Thursday. Silver fell 15.66% to $74.25 an ounce.

The Nasdaq Composite has fallen 2.9% over the past two days, its biggest slide since October, with volatility triggered by market bellwethers including Google parent Alphabet, which reported aggressive spending plans on Wednesday, and a rout in software stocks as they adapt to a new era of generative AI.

CLOSE CALL FROM BANK OF ENGLAND

Sterling was last down 0.75% against the dollar at $1.3550 and off 0.62% versus the euro, after the BoE left borrowing costs unchanged in a 5-4 split among the nine policymakers that make up its rate-setting committee.  

The pound, which fell to a two-week low, was under intense pressure all day from concern about the stability of the British government and whether Prime Minister Keir Starmer could survive the fallout from his decision to appoint Peter Mandelson as U.S. ambassador despite knowing about his ties to Jeffrey Epstein.

 "It was always likely that the PM could be fighting for his job after the May local election. Now it seems that a leadership challenger could come earlier," said Jane Foley, head of FX strategy at Rabobank London. "The pound would be particularly unsettled if the Labour leadership went to the left wing of the Labour Party."

The European Central Bank also delivered no change in interest rates at its policy meeting on Thursday. The euro was last down 0.16% at $1.1788. 

Markets show traders see little chance of an ECB rate cut this year. Even with the volatility that has dominated markets since the start of the year, the euro is only about 0.4% above where it was when the ECB last met in December.

However, the euro is 13% higher against the dollar than it was a year ago, which has added to concern among policymakers about the impact on regional price pressures, while inflation in the euro zone has fallen to around 1.7%, below the ECB's target of 2%.

In the crypto market, bitcoin hit its lowest since October 2024. It fell 11.65% to $64,162.66, its biggest one-day drop since November 2022. Ether slumped to a nine-month low, and was last down 12.4% at $1,862.

(Reporting by Laura Matthew in New York; Additional reporting by Amanda Cooper in London and Gregor Stuart Hunter in Singapore; Editing by Sam Holmes, Kirsten Donovan, Rod Nickel and Edmund Klamann)