(Reuters) - Sterling climbed to a more than two-year high on the dollar on Friday, on recent signs of strength in the UK economy and dovish comments from Federal Reserve Chair Jerome Powell that sent the dollar sliding against several global currencies.
Britain's pound jumped 0.7% to $1.3185, touching its highest since late March 2022. It surpassed a previous 13-month high of $1.3144.
The dollar index, that tracks the greenback's performance against six major currencies, dropped 0.5% after Powell said "the time has come" to adjust policy and promised to do all he can to avoid further weakening of labour markets.
"I think initially the market is really going to be dovish, taking interest rates down and taking the dollar down," said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Following Powell's remarks, traders priced in a bigger chance of a super-sized 50 basis point rate cut at the U.S. central bank's September meeting.
Sterling has been among the top performing major currencies this year, picking up steam in the last two months after a slew of stronger-than-expected economic data suggested the BoE need not be in a rush to cut interest rates.
Latest numbers showed British consumer confidence held at an almost three-year high in August. A survey on Thursday showed UK business activity accelerated in August and cost pressures eased to their weakest in over three years.
The latest milestone for sterling marks a turnaround since late 2022 when worries about soaring inflation and sluggish growth were compounded by then Prime Minister Liz Truss' economic plan that put Britain's fiscal health at risk.
The currency touched a record low of $1.0327 in September 2022, and has recovered about 27% since then. However, it remains down about 38% from a record high touched in 2007 before the global financial crisis.
After Powell's remarks, the focus for the pound shifts to Bank of England (BoE) Governor Andrew Bailey, who is set to speak at the symposium at 1900 GMT.
"Bailey does not have to deal with aggressively dovish pricing (-39bp by year-end), but the UK still needs to gain much more confidence on the inflation front," ING FX strategist Francesco Pesole said.
The BoE cut its Bank Rate to 5.00% from a 16-year high of 5.25% in early August, and market pricing shows traders see at least one more rate cut this year. The Fed, on the other hand, is seen cutting rates by at least 25 bps in each of the three meetings that is left this year.
Euro/sterling fell to a three-week low, to trade down 0.3% at 84.66 pence per euro.