LONDON (Thomson Financial) - The pound came off 26-year highs but stayed well bid above the 2 dollar level as the flow of strong UK data proved relentless.

Coming on the heels of a record surge in inflation, wage growth hit a high not seen in nearly three years, suggesting that the outlook for inflation may worsen over the coming months.

Average earnings growth including bonuses jumped to 4.6 pct in the three-month period from the year earlier, after a 4.2 pct rise in January. The figure is cause for concern at the Bank of England as it has vaulted above the 4.5 pct level thought to stoke inflationary pressures.

After the news, the pound jumped to 2.013 usd, a new multi-year high, before slipping back. The data coincided with the release of the minutes to the Monetary Policy Committee’s April meeting, where the MPC opted to leave interest rates on hold at 5.25 pct.

The minutes showed a 7-2 vote to hold in April but essentially confirmed market expectations that the Bank of England will hike rates in May.

In any event, the minutes have been overtaken by events, with yesterday’s surprise jump in key CPI inflation to 3.1 pct already making a May hike all but certain.

The spate of strong data has even led to talk of a hefty half-point rate hike, to 5.75 pct in May, BNP Paribas analysts said.

Fuelled by such speculation, the pound was well underpinned, with BNP Paribas analysts suggesting that sterling’s rise above 2.011 usd may open the way for further gains up to 2.037 usd.

But some analysts believe markets may be a running ahead too quickly.

Daniel Katzive at UBS noted that UK data may slow sufficiently to avoid a second tightening later in the year.

The pound was broadly flat against other major currencies, demonstrating that at least part of its strength is coming from the dollar’s overall weakness.

The US currency remained weak across the board after soft inflation data yesterday. The dollar sank to a new two-year low against the euro of 1.3614 usd.

“The dollar trades heavily with a number of currencies exceeding their December 2004 highs against it,” said analysts at HBOS.

“The fact that a leading group of currencies has already broken higher is encouraging for the prospects of the current dollar downtrend extending,” they said.

Elsewhere, the Kiwi dollar was a major winner, after a sharp rise in domestically generated inflation in New Zealand.

In the final quarter of 2006, CPI rose by 0.5 pct from the previous quarter, a little less than predicted. Focus was on domestically generated inflation which surged by 1.2 pct during the same period.

Interest rates in New Zealand are predicted to rise as a result, to 7.75 pct from 7.50 pct at present when the Reserve Bank of New Zealand meets on April 26.

If rates do rise, the Kiwi dollar will become even more attractive as the destination for carry trades funded in low yielding places like Japan.

The yen, meanwhile, stayed on the back foot although off recent lows.

“Intriguingly, some of the key carry trades are looking a bit tired over the past 24 hours, despite continued solid performance from global equity markets and stability in credit markets,” said Daniel Katzive at UBS.

He pointed out however that carry trades are likely to continue thriving over the medium term.

As the G7 is on a hiatus until its September meeting — finance ministers meet in May, but without central bankers — the risk of a sudden drop in risk appetite is reduced slightly, he added.

The recently concluded G7 meeting made no specific mention of the yen’s weakness, helping solidify carry trades even further.

London 1251 BST London 0926 GMT

US dollar

yen 118.33 down from 118.65

sfr 1.2049 up from 1.2034

Euro

usd 1.3575 down from 1.3608

stg 0.6769 up from 0.6761

yen 160.69 down from 161.47

sfr 1.6361 down from 1.6378

Sterling

usd 2.0057 down from 2.0119

yen 237.48 down from 238.75

sfr 2.4172 down from 2.4214

Australian dollar

usd 0.8331 down from 0.8371

stg 0.4152 down from 0.4159

yen 98.65 down from 99.37

New Zealand dollar

usd 0.7399 down from 0.7460

sivakumar.sithraputhran@thomson.com

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