CURRENCIES

THE POUND is expected to hover near its strongest level against the euro this week, amid optimism that growth in the UK is improving enough to persuade the Bank of England to leave interest rates untouched.

Signs that the central bank's 2.25 per cent rate of reduction in the past seven months is helping growth, coupled with worse than expected growth in the euro region, have lifted the pound about 8 per cent against the single currency this year, and 1 per cent in the past week alone.

"Sterling will remain around these levels," said Colin Harte at Gartmore Investment Management. On Friday, the pound rose to 0.6502 per euro, its strongest yet against the single currency and equivalent to 3.01 deutschmarks. It rebounded from a seven-week low against the dollar to climb to $1.6007 from $1.5960 late on Thursday.

Signs that the Bank of England's rate cuts are helping to stimulate growth in the UK came this week with reports showing house prices rose for a third month, and that optimism among manufacturers improved in May. A separate survey showed more optimism about the economy among the public than there has been for a year.

"Any prospect of better growth is pound-supportive," said Jeff Woodruff, a currency strategist at Bank Boston, who said companies are keen to buy the pound at $1.60.

Evidence of improved economic activity this week could deter the Bank of England from cutting interest rates further. UK interest rate futures contracts that settle in September anticipate three-month rates of 5.22 per cent, up eight basis points from Wednesday, suggesting fewer investors are expecting another rate reduction.

"I think it's a 60-40 chance they'll stay on hold when the Bank of England meets on 9 and 10 June," said Lee Ferridge at Rabobank International.

Speculation that the UK may delay entering Europe's currency union is helping to buy the pound, analysts said. Bank of England Governor Eddie George said last week that it would be difficult to see how the UK, Europe's third-largest economy, would fit into the single currency at the moment.

"Any idea that the UK is steering away is supportive for the pound," said Mr Woodruff. The euro has been the third-worst performing of the world's major currencies so far this year.

In New York trading on Friday, the euro fell to $1.0404, its lowest level yet, as traders ignored comments by European Central Bank officials that they won't let the single currency decline much further. Many analysts expect the euro to fall to parity with the dollar during the summer.

The Swiss franc, which is near a 10-month low versus the dollar, may extend losses, hurt by euro weakness and expectations that economic growth in Switzerland will continue to lag the US. Slowing European growth will hurt Switzerland, which is the most export-dependent economy in Europe and sends about two-thirds of its goods to the euro zone.

"Dollar-Swiss is flying," said Russell Beacham, an analyst at Thomson Global Markets. The US currency could rise as high as 1.5310 francs, which would be a 10-month low.