CURRENCIES

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The Independent Online
THE POUND is expected to hold last week's 1.5 per cent gain against the dollar, on traders' expectations that any cut in Bank of England rate later this year will bolster growth and outweigh a decline in returns on sterling deposits.

The central bank left its securities repurchase rate at 5.25 per cent this week, though it said that if the pound stays strong - possibly slowing the inflation rate to below the Government's target - it might cut rates again. The bank has cut rates six times since October, by a total of 2.25 per centage points.

"We've had 225 basis points of cuts and the pound has gone up," said Derek Halpenny, a currency economist at Bank of Tokyo-Mitsubishi. "In terms of ensuring they lower interest rates enough to keep growth on track and inflation on target, that makes the pound quite attractive a currency to be in."

Friday, the pound slipped to $1.6349 from $1.6403 on late London trading Thursday, after Bank of England governor Eddie George said sterling was over valued. It touched a six-week high against the dollar Thursday of $1.6435.

The pound was little changed against the euro at 0.6593 pound per euro. It has risen 6 per cent since the euro's inception on 1 January.

Outlook for UK inflation will come Wednesday when the Bank of England releases its quarterly inflation report. The bank is charged with keeping the Government's inflation target of 2.5 per cent, as measured by retail price inflation, excluding mortgage interest payments.

The pound has defied recent rate cuts by rising 4 per cent against the currencies of its 21 major trading partners since the first cut on 8 October. The pound has been buoyed as worse-than-expected growth in the 11-member euro region hurt the euro, and amid evidence the lower UK borrowing costs are aiding growth.

Lower interest rates can typically hurt a currency by diminishing the returns on deposits in that currency. While the return on three-month sterling deposits has declined more than 200 basis points since October, it's still better than the yield on dollar, euro, Swiss franc or yen deposits.

"It's time to put a bit of money in the pound," said Stav Loizou, manager of the strategic trading group at Fuji Bank.

UK economists are split on whether the Bank of England's monetary policy committee will cut rates at its June meeting. Nine out of 17 economists in a survey predicted the MPC will keep the rate unchanged, while the remainder forecast a 25 basis point cut. That would take the repurchase rate to its lowest in 22 years.

More details on the state of the UK economy will come in the week with reports on producer prices on Monday and industrial production on Tuesday.

Meanwhile, the dollar on Friday halted a three-day decline against the euro after a US jobs report calmed concern that growth has been accelerating fast enough to stoke inflation.

"The report removed the possibility of another day of losses for the dollar" by reversing a bond slump that had hurt the dollar, said Mike Faust, a money manager at Bailard, Biehl & Kaiser in San Mateo, California. He's looking to add to his dollar holdings on any dips between $1.08 and $1.09 per euro.

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