"Sterling is proving resilient to the rate cuts we've had and the expectations for the cuts to come," said Danyelle Guyatt, a fixed-income analyst at Deutsche Bank.
"It will stay around current levels against the mark. Even as rates fall, there's still a substantial differential in the pound's favour."
On Friday, the pound fell to DM2.7973, from DM2.8060 late Thursday. It fell to $1.6557 from $1.6670. It hasn't extended the losses that took it to a 17-month low against the mark on 8 October. It's risen about 1 per cent since then, though it's now down more than 8 per cent since its peak in March.
The Bank of England has twice cut its benchmark rate in the last two months to 6.75 per cent, a reduction that also lowers the return on pound deposits, weakening the currency. Even so, the return on sterling deposits is still more attractive than the return on other currencies. Three-month deposits pay 6.96 per cent; mark deposits return just 3.64 per cent.
"We'll probably see some slippage in the pound" in coming months, said Eddie Middleton, at Britannia Investment Management.
"The downside for sterling is limited by the fact that the differential with Europe will still be high." He expects the pound won't drop below DM2.60 by the end of 1999.
Expectations for more rate cuts were kept intact on Friday after a report showed the economy grew 0.4 per cent in the third quarter, less than the Government's preliminary estimate.
"We certainly can't rule out a cut, possibly as early as December," said Lande Abisogun, an economist at the market research firm IDEA. "We've had a downward revision and now we have to look at the survey evidence and we expect that to remain gloomy."
More clues could come with the trade figures on Wednesday. Analysts expect the deficit with non-European Union countries fell to pounds 1.460bn in October. A shrinking trade deficit can boost sterling.
The dollar rose against the yen on Friday in New York trading after the Japanese Finance Minister, Kiichi Miyazawa, ruled out an immediate reduction in the nation's sales tax, even though many economists say such a cut would help lift Japan from recession.
"Miyazawa threw some cold water on hopes," said David Factor, trader at American Express Bank.
"A reduction in the consumption tax would be positive for the yen," because it would encourage consumers to spend more, he said.
The dollar rose against the DM for a third day after a bigger-than-expected decline in German producer prices suggested European interest rates may be cut early next year.
"Once 1999 gets under way, there's a good chance the ECB will cut rates," said Robert Katz, a currency trader at MTB Bank.
"Interest rate differentials are starting to swing back in favour of the dollar."
The dollar climbed to Y120.31 from Y119.93 on Thursday. It also rose as high as DM1.6925 from DM1.6865 and was recently at DM1.6898. Copyright: IOS and BloombergReuse content