Currencies

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The Independent Online
THE POUND is expected to rise against the dollar this week, extending last week's 1 per cent gain, amid further evidence that the lowest UK interest rates in 22 years are boosting economic growth.

A report on Wednesday is likely to show that UK retail sales rose for a second month in June. That follows surveys last week showing that the manufacturing industry expanded for the first time in a year during the second quarter, and that confidence among consumers rose to near record levels during the same period.

"We're seeing signs that the real economy is starting to pick up," said Mike Metcalfe, currency strategist at NatWest Global Financial Markets. "Sterling around the $1.55 level was always looking cheap. We do expect the pound to return to its $1.60 to $1.70 range [in which it traded for most of the past two-and-a-half years]."

On Friday, the pound was at $1.5637, up about a cent and a half from Monday's 35-month low of $1.5483. It was little changed for a fourth day against the euro, at 0.6515 per euro from 0.6520 on Thursday, and up about 8 per cent against the single currency since the start of the year.

Economists expect sales at UK shops and supermarkets to have risen 0.2 per cent in June from May and 3.3 per cent from a year earlier. Sales rose 1.0 per cent in May from the previous month.

"We've got low inflation and an economy that is starting to pick up momentum," said Chris Iggo, chief economist at Barclays Capital. "It's good news for sterling," he added.

Signs that growth is picking up could persuade the Bank of England to leave its benchmark interest rate untouched at 5 per cent. The bank's Monetary Policy Committee cut the rate from 7.5 per cent in seven steps, beginning in October.

On Wednesday, the central bank releases the minutes of its monetary policy meeting earlier this month at which rates were left unchanged. At the bank's June meeting, eight of the nine committee members favoured cutting the benchmark rate.

"We certainly don't expect another easing in the UK this year," said Mr Metcalfe at NatWest. "The MPC has already done its job [in protecting economic growth]," he added.

In one sign that investors don't expect any further rate cuts, the rate on the September sterling interest rate futures contract stands at 5.09 per cent. That's near enough to current three-month lending rates of 5.12 per cent to suggest there's little speculation about any change in rates in coming months.

On Friday, a report is likely to show that the trade deficit with countries outside the EU was little changed at pounds 1.2bn in June. Exporters have been given a boost by the recent weakness in the pound.

The pound has slipped almost 6 per cent against the dollar this year as the return on dollar deposits rose above those on sterling deposits, drawing investors to the US currency.

"We're pleased by the move in the dollar," said John Muirhead, group treasurer at Britax International. The pound's rate against the dollar "has gone in the right direction and a lot quicker than we believed".

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