"We don't expect sterling or the dollar to weaken against the euro," said Jesper Dannesboe, an economist at ABN Amro Bank. "The UK economy is doing extremely well and will continue to do well next year. Even though the euro economy is growing, that's not enough for a sustained euro rally."
The pound reached its strongest level of pounds 0.6202 per euro on Tuesday and finished the week at pounds 0.6279, a record low for a Friday close. Against the dollar, sterling fell to $1.6028 on Friday having risen as high as $1.6276 on Tuesday.
Reports in recent days have shown that while inflation is still below the Government's 2.5 per cent target, unemployment is at a 19-year low and wages are increasing. This is prompting analysts to speculate that the Bank of England may soon lift interest rates to keep inflation in check two years down the line.
This week, the BoE releases minutes of this month's Monetary Policy Committee meeting, when rates were left unchanged. Analysts will scrutinise the notes for the split of votes in the hope of determining where rates are headed early next year.
Higher rates make the returns on sterling deposits more attractive. The Bank raised its key rate in September and November, each time by a quarter point, lifting the repurchase rate to 5.5 per cent.
Meanwhile, the dollar gained against the euro last week as climbing US stocks drew demand for the currency, and growth in Europe wasn't enough to prompt international investors to favour the common currency, traders said.
The Nasdaq Composite Index gained 4 per cent last week.
"I think it's going to be difficult for the euro to rally in the short term when a lot of money is being put to work in the US stock market," commented Aisling Freiheit-Kinch at Morgan Stanley Dean Witter in New York.
The dollar rose to $1.0098 per euro from an earlier one-week low of $1.0245. The dollar also rose against the Japanese currency to finish the week at 103.33.
"Despite continued good economic data from Europe, there's still fundamental interest in selling [euros for dollars]," said John Cholakis, a trader at Dai-Ichi Kangyo Bank - because for the euro, "every rally attempt fails."
By contrast, the pound rebounded from its lows against the dollar in the early part of last week after a decline in US bonds and a report of increasing business confidence in Germany sapped some of the dollar's strength.
"Sterling bulls have taken advantage [of the pound's dip and] recaptured the $1.61 level," said Brian Kiely, a technical strategist at the Royal Bank of Scotland, before the Friday fall. He expects the pound to rise to $1.6310 and, if it breaches that level, to climb as high as $1.6450 this week.
Sterling has risen 6.5 per cent against a basket of the currencies of Britain's main trading partners this year. Earlier last week, it was up 7.7 per cent, its highest level since June 1998.
The pound has gained 12 per cent against the common currency this year.Reuse content