"The pound has got a patchy ride at the moment," said Derek Bartlett, the chief executive of City Financial Managers. "US rates are perceived to be going up and UK rates down."
A narrowing interest-rate differential between UK and US interest rates dims the allure of pound-denominated assets. Three-month sterling deposits currently pay 5.38 per cent, while dollar deposits yield 4.93 per cent.
On Friday, the pound fell as low as $1.5970, near the 17-month low of $1.5939 it reached on Wednesday. The last time sterling dipped below $1.60 was October 1997. Sterling was little changed at 0.6854 per euro.
The pound has climbed 2.5 per cent against the euro since the currency's inception amid expectations the Bank of England's five interest-rate cuts since October will help fend off recession in the UK, while growth in Germany, Europe's cornerstone economy, is set to slump.
In the UK, the central bank's Monetary Policy Committee meets for its monthly rate setting session on Tuesday and Wednesday. The MPC has already slashed 200 basis points off the benchmark securities repurchase rate in the past five months, taking it to 5.5 per cent. It is set to trim borrowing costs further, according to investors.
"UK interest rates are set to fall more rapidly than anywhere else," said Philip Williams, at Chiswell Associates. The benchmark rate could fall to 5 per cent by the end of the year, and as low as 4.5 per cent a year from now, he said.
Expectations for lower UK interest rates are reflected in the interest- rate futures market. The implied yield on the June contract stands at 5.18 per cent, far enough below three-month lending rates of 5.44 per cent to suggest many traders anticipate rates will fall further by mid- year.
Still, that yield rose 8 basis points on Thursday after a survey showed the pace of decline in manufacturing industry may be slowing, prompting speculation that central bank policy-makers will not cut borrowing costs this week.
"We think they'll take the opportunity to pause," said Mark Wall, an economist at Deutsche Bank.
If the bank cuts rates again, it would be the first time rates have fallen for six consecutive months since 1977.
When the MPC sits for its meeting, it will have more evidence on the state of the economy. The Office for National Statistics said it will resume the publication of the average earnings index on Tuesday after a four-month suspension.
The figures were suspended in November pending an inquiry into their reliability after claims they exaggerated the strength of wage inflation early last year, prompting the Bank of England to raise interest rates to 7.5 per cent in June.
Tuesday's report is "likely to show that wage growth has indeed slowed, as the anecdotal evidence suggests", said David Brickman, an economist at PaineWebber International. That will provide "more scope for the MPC to lower base rates further", he said.Reuse content