Currencies

THE POUND is expected to be little changed this week, trading near a two-month low, on speculation that the Bank of England will not raise rates when it meets on Wednesday and Thursday.

"We certainly don't think rates will go up," said Adrian Schmidt, senior economist at Chase Manhattan Bank. The pound "could dip below DM2.90" if rates are not raised, "though much of it is priced in already", he said.

On Friday, the pound was little changed at DM2.9104. Against the dollar it was little changed at $1.6365 from Thursday. The pound is down about 4 pfennig from a week earlier, after a survey showing a manufacturing industry slump convinced many investors that the Bank of England may not need to raise rates again this year to cool the economy and slow inflation.

The yield on the September short sterling futures contract, a measure of interest rate expectations, has fallen 5 basis points to 7.79 since the survey, suggesting growing expectations for unchanged rates.

The majority of economists expect the central bank will not raise rates this week. They also predict the bank will leave the benchmark rate unchanged for the rest of the year.

If interest rates do not rise, neither does the money-market return on pound-denominated deposits. The benchmark lending rate stands at 7.5 per cent, its highest since November 1992. It has been raised six times in the past 14 months.

"We think interest rates have topped out," said Jeremy Hawkins, the chief economist at Bank of America.

He said the survey "was not so much about manufacturing but about the weakness spreading to the service sector" which accounts for about three- quarters of total economic output.

He added that a service industry survey from the Chartered Institute of Purchasing and Supply due on 5 August would boost expectations that the Bank of England will not increase the benchmark lending rate.

He expects the pound to fall to DM2.82 and $1.55 by the year end.

"The pound is a one-way bet," said Iain Lindsay, head of capital markets strategy at BMO Nesbitt Burns.

He also expects the pound will decline to DM2.82 by the year-end as "whatever happens next week will be the peak for rates".

The dollar rose to a six-week high against the yen after the Japanese Finance Minister, Kiichi Miyazawa, said that economic performance rather than market manipulation by governments, should determine the yen's value.

His comments suggest that Japan will not sell dollars to prop up the yen or ask other countries to do so.

"Under usual circumstances this would be a reasonable policy but with the Japanese economy falling off a cliff it does raise the question of how quickly the yen could fall," said Ken Wattret, an economist at Paribas Capital Markets.

He predicts that the yen will weaken to 150 per dollar by the end of the quarter.

The dollar rose as high as Y144.80 in New York on Friday afternoon. Against the mark, it slumped to DM1.7792 from DM1.7822 on the expectation that economic reports out of Germany this week will provide proof that growth there is increasing and will support prospects for higher interest rates.

For the week, the dollar rose 2 per cent against the yen and was unchanged against the mark.

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