Pound recovery accelerates as Trump's trade war drags on dollar

James Sillars, business reporter

The pound hit a seven-month high against the dollar and was trading at levels against the euro not seen more than two years on Wednesday.

The moves, which will offer some relief to UK holidaymakers converting cash abroad, were seen as a building of momentum behind the UK currency in a week that has witnessed the dollar come under pressure over fears of an escalated US trade war.

Donald Trump signalled an expansion of his protectionist agenda on Monday as he threatened tariffs on steel and aluminium from Brazil and Argentina - saying their weakened currencies had made US products uncompetitive.

The US president then turned his fire on France, warning tariffs could be slapped on champagne, luxury handbags and Roquefort cheese in retaliation for a revenue tax on big US tech firms.

Tuesday saw him admit, during a news conference on the fringes of the NATO summit in London, that his 16-month trade fight with China - blamed for curbing economic growth worldwide - could drag on beyond next year's US presidential election.

US stock markets, which had been trading at record levels last week, joined others globally in finding a reverse gear - the FTSE 100 closed Tuesday's session 1.8% lower, while the pound hit €1.30 for the first time since October.

The pound gained further ground - more than a cent - on Wednesday to hit levels not seen for seven months just below $1.31.

Traders cited in-house trading obligations to buy sterling when the dollar reaches certain lows.

But they also credited a market looking for a conclusive result in the general election from opinion polls.

The theory, for investors, is that forecasts of a Conservative majority support the likelihood of a faster end to Brexit uncertainty and the release of pent up demand in the economy.

Sterling barely moved when the latest economic data, from the IHS Markit/CIPS purchasing managers' index survey series, suggested activity in the UK's powerhouse services sector was at an eight-month low amid political and economic uncertainty.

The pound was also at its highest level against the euro since May 2017, trading above €1.18.

The further sterling strengthening on Wednesday limited the FTSE 100's recovery as other European indices clawed back ground.

That is because the top-flight index has many dollar-earning constituent companies.

Neil Wilson, chief market analyst at Markets.com, said of the market moves: "Volatility is a double-edged sword for the trader and, for better or worse, it's back.

"The confident march of the bulls into the year-end has come unstuck.

"With the S&P 500 up 23% and Europe, ex-UK, up about 15% this year there is still room for investors to be booking profits into Christmas that could spell further downside pressure.

"Last year it was the Fed to blame, today it's Trump and trade.

"Things may get a little dicey as we run towards the 15 December deadline for the planned tariff hike on $156bn (£119.5bn) in Chinese goods by the US."