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Pound reaches 26-year dollar high

BBC | April 18, 2007

Sterling has continued to climb against the US dollar, moving above $2.01, the highest rate since June 1981.

The currency broke through $2 level on Tuesday after unexpectedly high UK inflation figures indicated further UK interest rate rises were likely.

The Bank of England is widely expected to raise rates on 10 May and at least once more later in the year.

The US dollar is also at two-year lows against the euro and 17-year lows against the Australian dollar.

'Most pronounced'

"Sterling's rise above $2 is a consequence of both sterling strength and dollar weakness," said Howard Archer, an economist at Global Insight.

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"While there is no denying that the pound is strong overall, it is also notable that the dollar is trading at a two-year low against the euro."

Analysts said that concerns about a slowdown in the US economy, and the fact that interest rates may have to come down to safeguard growth were behind the dollar's weakness.

Higher interest rates increase demand for a currency as investors look to buy into assets that offer higher yields.

"The negative dollar sentiment right now is related to the US economy's potential for further slowdown and therefore rate cuts from the Fed," said David Powell, senior currency strategist, at IDEAglobal.

"We do expect the US to return to trend growth toward the end of the year," he added.

"But in the meantime, we could be in for a period of sustained dollar weakness and we expect that to be most pronounced against the euro and sterling in the coming days and weeks."

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