Currencies

THE British pound is expected to be little changed this week, though expectations Thursday's surprise rise in interest rates by the Bank of England is likely to undermine the currency in following weeks.

"There's mounting evidence that the slowdown in the export sector is filtering through to the service sector, which should prevent another rate rise," said Eric Fishwick, an international economist at Nikko Europe.

The pound finished last week lower, at DM2.9015 compared with Monday's opening rate of DM2.9165. It rose as high as DM2.9278 after the rate increase.

The Bank of England raised its benchmark rate by a quarter-point to 7.50 per cent, the highest it's been since November 1992. Mr Fishwick said he expects the pound to hold at about DM2.90 this week, though he sees a decline to DM2.80 by the end of June as the economy slows at the same time as accelerating German growth fuels concern about a German interest rate increase.

The Bank of England cited February's rise in average earnings of 4.9 per cent, as prompting the rate increase. That's more than the economy can sustain without pushing inflation rates up, the central bank said.

"The rise in average earnings was exaggerated by one-off bonuses paid in February," said Keith Edmonds, chief currency analyst at IBJ International. "There's a risk of higher official rates, but I reckon it's about a 33 per cent chance because the underlying trend is for lower wages."

The pound lost ground against the dollar on Friday after the US saw higher than expected jobs growth in May, fuelling concern that the US Federal Reserve Board may raise interest rates when it meets on 1July.

The pound fell to $1.6363 from $1.6402 on Monday.

"We expect one more interest rate hike in the US of 25 basis points, which would lift the dollar to $1.80 against the pound in the days ahead of the meeting," said Michael Lewis, currency strategist at Deutsche Morgan Grenfell.

"We think the pound will fall to 2.85 against the mark over the next month as the German economy picks up steam."

The dollar rose to a seven-year high against the yen, climbing to just shy of Y140. "We're in a Goldilocks economy,'' said Joe Cambria, head of spot trading at Credit Suisse First Boston. "It's not too hot, not too cold. We're still in economic nirvana. We could see the dollar rise to 141 next week."

For the week, the dollar rose 0.65 per cent against the yen. "Traders are going to buy dollars until they're given a reason not to," said Ralph DelZenero, at First Chicago. "There's no reason to hold Japanese assets right now."

Copyright IOS & Bloomberg.