LONDON, March 27 (Reuters) - The pound fell for a fourth day on Friday, as it headed for its weakest monthly performance against the dollar since October, as fears of a global energy shock from the Middle East war have driven investors into the U.S. currency as a safe haven.
Sterling has fallen by 1.5% in March, slightly more than in February, making this its worst monthly performance since last October.
But the pound is also the best performing currency against the dollar since the war started. The euro is down around 2.5% in that time, while the safe-haven yen and Swiss franc have lost 2.4% and 3.6%, respectively.
The Bank of England, which prior to the war had been expected to cut rates twice this year, is now expected to deliver as many as three hikes, according to money markets, compared with expectations in a Reuters poll for no change in 2026.
Bank of England policymaker Alan Taylor said on Thursday that he saw a high bar to hiking interest rates and it was preferable to hold borrowing costs until there was greater clarity on the impact on the economy from the war with Iran.
Taylor, who until the start of the conflict was a long-time advocate for lower interest rates, voted this month to leave them on hold, as did all the other eight members of the Monetary Policy Committee, some of whom warned rate hikes could happen.
Given how much higher inflation is in Britain than in other developed economies, UK government bonds have been sold more aggressively, which has pushed up yields more quickly - something that theoretically offers the pound some support.
Two-year gilt yields, which are the most sensitive to expectations for inflation and interest rates, are up by almost a percentage point since the war started, near their highest for almost 2-1/2 years .
"Sterling remains largely resilient but higher borrowing costs, if sustained, alongside weaker growth will inevitably reduce fiscal headroom," analysts at Bank of America, who recommend selling the pound against the dollar, said in a note.
The UK's borrowing costs are far higher than almost every other developed-market economy and finance minister Rachel Reeves is under pressure to keep the government's finances on track, given that she has limited room for manoeuvre.
Reporting by Amanda Cooper; Editing by Alison Williams
