By Amanda Cooper
LONDON (Reuters) - The pound rose on Monday, taking advantage of a hefty decline in the dollar against the Japanese yen that spilled into other currencies.
Against the yen, the pound fell by almost 1% after Bank of Japan Governor Kazuo Ueda at the weekend said the central bank could end its policy of negative interest rates, which has undermined the yen, when achievement of its 2% inflation target is in sight.
The dollar bore the brunt of the rush into the yen, falling by the most in two months against the Japanese currency.
Sterling was last up 0.4% against the dollar at $1.2521. Against the euro, the pound put in a slightly less robust performance, rising by 0.2% to 85.70 pence.
The pound fell by almost 1% against the dollar last week, as a combination of stronger economic data and weaker investor confidence fuelled a push into the U.S. currency.
It has lost about 5% in value since July's 15-month peak, but it is still up by over 20% since last September's record lows and is up 3.5% so far this year, pitting it against the Swiss franc, the top performer against the dollar in 2023, which is up 3.7%.
The Bank of England meets next week to discuss monetary policy. Traders are attaching a 70% chance of a quarter-point rise in the Bank Rate to 5.50%. But they have slashed the chances of another rate rise after that, marking a sharp turnaround from just a week ago, when money markets showed UK rates were expected to peak at closer to 5.7% by March.
Part of sterling's resilience this year has been the perception that the BoE has a lot more work to do to bring down inflation and will need to raise interest rates more than many other central banks.
But with the end seemingly in sight as far as markets are concerned, sterling may struggle to gain much upward momentum in the coming weeks, according to MUFG strategists led by Derek Halpenny.
"We currently still expect a hike but weak key data into the meeting could see conviction on a hike undermine sterling performance further over the short-term," they said in a note.
The MUFG team said according to their valuation models, sterling is one of the most undervalued currencies against the dollar, to the tune of 3.23%.
Their model uses short-term swap rates, the performance of the stock market and where short-term bond yields trade relative to longer-term ones.
Right now, the pound is trading at a large discount to their model.
"Short-term shifts between spot and the model suggest a currency pair is no longer in sync with financial and economic fundamentals and the market is adding a risk premium to the currency pair," they said.