CURRENCIES

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The Independent Online
THE POUND is expected to extend last week's 1 per cent climb against the dollar amid speculation the Bank of England will lift benchmark interest rates again before the end of the year.

The Bank has already increased rates this month to ensure that booming house prices and the lowest unemployment in two decades do not boost inflation. Recent reports showed the unemployment rate fell to a new 19-year low in August, while the economy grew more than the Government first forecast in the second quarter.

With growth picking up now, the outlook is for further rate rises in the UK, said David Brickman, an economist at PaineWebber International. "Given the growth numbers we had and the tight labour market, one rate rise may not be enough, and the pound may rise to $1.65," he said.

On Friday, Britain's currency rose as high as $1.6470, its highest since 24 March, when it was at $1.6480.

The euro was at 0.6374 a pound and not far from its lowest level ever, 0.6347 a pound, reached on Thursday. That's equivalent to the pound at DM3.08, its strongest since April 1998.

"We forecast the Bank of England will slowly push interest rates upwards as the UK labour market continues to post improvements," said Michael Hartnett, senior international economist at Merrill Lynch. "We believe a target of $1.70 in coming quarters is not unrealistic."

Higher interest rates mean a better return on deposits denominated in pounds. And that can attract investors to sterling.

A report by Nationwide Building Society on September house price gains may cement rate-rise expectations. The mortgage lender's report for August showed house prices rising at their fastest pace since May 1993.

The Bank of England's Monetary Policy Committee cited house-price gains as part of the reason for its 25-basis point rate increase on 8 September, taking the rate to 5.25 per cent.

The index of manufacturing activity tracked by the Chartered Institute of Purchasing and Supply may bolster the outlook for higher rates by underscoring vigour in the manufacturing industry.

Last month, the group's index indicated manufacturing grew for the third straight month in August as factories increased output at the fastest rate for more than two years, and raw material prices rose for the first time in four years.

In New York, the yen fell against the dollar on Friday for the first time in a week as plummeting Japanese stocks sapped foreign demand for the currency. Traders were also reluctant to place bets ahead of this weekend's Group of Seven meetings, where a decision might be taken to intervene to weaken the yen.

The Nikkei's fall "took a little bit of upside pressure off the yen," said John McCarthy, manager of foreign exchange at ING Baring Capital Markets.

The yen weakened to 104.17 a dollar from 103.72 on Thursday, after it reached a 44-month high of 103.20 a dollar the week before. The dollar could fall again if US stocks remain weak and fan worries that "you are going to see some repatriation over coming weeks of capital out of US equity markets and heading home," according to James Culnane at Norddeutsche Landesbank.

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