11th September 2026
There is a curious development taking place in the currency markets as oil prices surge and fears of higher inflation spread around the world. The US dollar is gaining ground, but sterling is holding remarkably steady.
At first sight that may not seem particularly important. The pound is not rising dramatically and there is certainly no sign of a currency boom. But in the present circumstances, simply holding its value while the dollar strengthens is quite significant.
Brent crude has risen to around $109 a barrel, its highest level for four months, after gaining almost 13% over the past week. The rise is being driven by the continuing conflict in the Middle East and disruption to important shipping routes.
That has produced a familiar reaction in financial markets. Investors are becoming more worried about inflation, bond yields are rising and expectations of higher interest rates are increasing.
But currencies do not all react in the same way. The dollar is benefiting from two forces. The US dollar has traditionally benefited when investors become nervous. When there is uncertainty, international investors often move money towards dollar assets because the United States remains the world's largest financial market and US government debt is regarded as one of the main safe havens.
There is another factor this time. Higher oil prices are increasing expectations that the US Federal Reserve may have to keep interest rates higher than previously expected. Markets are now putting the probability of a 0.25 percentage point US rate increase at around 71%, while the yield on the 10-year US Treasury has risen to about 4.97%.
That makes dollar-denominated investments more attractive. The result has been a stronger dollar index, which recently stood around 99.1 and close to its weekly high.
This is important because the dollar is not strengthening simply because the American economy is suddenly booming. It is gaining partly because investors are looking for somewhere relatively safe to put their money and because US interest rates may remain higher.
And what about the pound?
This is where the story becomes more interesting for Britain. Sterling has been remarkably steady.
The pound was around $1.351 against the dollar on Friday, having moved relatively little despite the turmoil elsewhere. Earlier in the week it had been around $1.355. Sterling has also remained within a fairly narrow range against the euro.
That does not look spectacular. But currency markets are relative markets. If the dollar is strengthening because investors are becoming more cautious, a currency which holds its ground is doing considerably better than one which is falling sharply.
Britain therefore appears, at least for the moment, to be somewhere in the middle of the international currency storm rather than at its centre.
Why isn't sterling falling?
One explanation is that Britain has its own inflation problem and therefore cannot easily be described as an economy where interest rates are about to collapse.
The Bank of England has already been dealing with inflation that has proved stubborn. If oil remains above $100 a barrel for an extended period, higher petrol, diesel, transport, heating and production costs could put further upward pressure on prices.
That could make it difficult for the Bank of England to cut interest rates aggressively. In other words, the same oil shock which some support for sterling because it makes lower UK interest rates less certain.
This is an uncomfortable form of currency stability.
It is not necessarily a sign that Britain is becoming economically stronger. It may instead reflect the fact that markets expect UK interest rates to remain relatively high because inflation remains a problem.
The dollar's strength has another side
A stronger dollar matters because oil is normally priced in dollars. When the dollar rises, countries whose currencies fall against it effectively pay even more for imported oil in their own currency.
That creates a particularly difficult problem for countries heavily dependent on imported energy.
The Indian rupee, for example, has already fallen by roughly 1% over three sessions as oil prices have climbed and US bond yields have risen. India's central bank has been intervening to support the currency.
This illustrates how an oil shock can spread far beyond the oil market. The first problem is the price of the oil itself. The second is the exchange rate used to buy it. The third is what happens to inflation once the higher energy cost works its way through transport, food, manufacturing and services.
For Britain, sterling's stability provides some protection. If the pound were simultaneously falling sharply against the dollar, the effect of a $109 barrel of oil would be even more painful.
There is a bigger issue developing in the bond markets
The currency story cannot really be separated from what is happening to government bonds.
The US 10-year Treasury yield is now close to 5%, while the 30-year yield has risen to around 5.38%, its highest level in almost two decades. Bond yields have also been rising elsewhere.
That matters because government borrowing costs eventually feed into the wider economy. Mortgages, business loans, investment decisions and government borrowing are all influenced by the cost of money.
This is why the present market movements deserve attention even from people who never buy shares or trade currencies. Financial markets can move ahead of the official economic statistics.
If investors decide that inflation will remain higher for longer, bond yields can rise before central banks actually increase interest rates. The cost of borrowing can therefore increase before a formal decision is made by the Bank of England or Federal Reserve.
Sterling may be giving Britain some breathing space
For British households, the relatively stable pound is therefore one of the more positive aspects of an otherwise worrying situation.
It does not eliminate the oil problem. Petrol and diesel can still become more expensive. Transport companies face higher costs. Heating oil becomes more expensive. Food producers face higher energy and transport bills. But a stable pound means Britain is not suffering the additional currency shock being experienced by some other oil-importing economies.
The danger would be if the present situation changed. If investors began to believe that Britain's inflation problem was becoming significantly worse than that of its trading partners, or that the UK economy was weakening much faster than expected, sterling could come under greater pressure.
For now, however, the message from the currency markets is rather different. The dollar is gaining because the world is becoming more nervous. Sterling is holding its ground because Britain, while exposed to the same oil shock, is not currently being treated as one of the major currency risks.
That may not sound like much of a victory. But when oil is approaching $110 a barrel, government bond yields are climbing and investors are looking for safety, simply keeping the pound relatively steady could prove to be quite valuable.
The next question is whether that stability can survive if the oil price stays above $100 for weeks rather than days.
That is where the currency story could become much more important for Britain.