Sterling fell more than one percent against the surging dollar on Friday, with the greenback boosted by hawkish comments from a Federal Reserve official, but retested a two-month high on the euro. The chief influence was comments from St Louis Fed President William Poole, who told in an interview the Fed must raise rates faster than present expectations if inflation accelerates. The dollar gained steeply across the board as the market took the comments to suggest Fed tightening could be more aggressive than it had been anticipating. "It's a dollar effect with everything falling back in its wake. There's not much independent weakness for sterling and that's illustrated by the euro/sterling cross," said Tim Fox, market strategist at National Australia Bank in London. Sterling fell more than one percent to $1.8220 but had pulled off the low to $1.8245 by 0855 GMT. It climbed to 65.46 pence per euro in Asian trading, just one tick off a one-year high set in mid April, before retreating to stand almost unchanged on the day at 65.71. News that Prime Minister Tony Blair's ruling Labour party was projected to have come third in local elections held on Thursday appeared to have had little impact on the pound. "If there was a political effect it would show up in more rates than just cable. It was local elections, a mid-term vote and will be seen as a protest vote," Fox said. The results will be followed later on Friday with London mayoral results and then European parliament results on Sunday.
Blair's public ratings have plunged over the past year and media speculation about his future as Labour leader heats up periodically, although it has not weighed heavily on sterling in recent months as the focus has been on the outlook for British interest rates. The Bank of England fulfilled expectations and raised the cost of borrowing by 25 basis points to 4.5 percent on Thursday and accompanied the move with a hawkish statement. As justification for the move it cited rising inflationary pressures as the sparse spare capacity in the economy continued to diminish. Analysts said the rise, the fourth in eight months, marked the end of a gradual approach to tightening, as the Bank had opted to push rates up twice in as many months and prospects of more to come would keep sterling well underpinned.///