Currencies

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The Independent Online
THE British pound is seen little changed, since a rate cut that is expected from the Bank of England's policy makers will still leave UK interest rates higher than in Europe.

"On interest rates, you've got the best in the UK," said Denis Gould, manager at Axa Sun Life Investment Management, who expects the Bank of England to cut rates by a half-point this week.

On Friday, the pound rose to DM2.7861 from DM2.7853 late on Thursday. It was little changed against the dollar at $1.6678 from $1.6660.

The Bank of England's Monetary Policy Committee meets on Wednesday and Thursday. The MPC has already cut its base lending rate at each of its last two monthly meetings, leaving it at 6.75 per cent.

The pound was down much as 6 pfennigs in the week until Germany's Bundesbank touched off a wave of rate cuts on Thursday among the 11 European Union countries that will adopt a single currency, the euro, on 1 January. Germany, France, Spain, Portugal, the Netherlands, Finland, Ireland, Belgium and Luxembourg, and Austria all cut to 3.0 per cent. Italy brought its rate down to 3.5 per cent.

The round of cuts fed speculation that UK rates are headed lower this week. Of 19 economists surveyed on Thursday afternooon, 16 expect a quarter- point cut, one sees a half-point reduction, and two forecast unchanged rates after this week's meeting. The previous week's survey showed 14 of 18 expecting unchanged rates and only four expecting a cut.

While the UK is not obliged to cut rates, since it is not joining the single currency, it may be more likely to do so if economic growth elsewhere in Europe is slowing. While fuelling economic growth, lower rates undermine a currency by reducing its money-market return.

Yet even if lower rates are the prescription to resuscitate growth, a half-point cut would still leave UK rates higher than the 3.0 per cent rate in the euro-11. Currently, a three-month deposit in the UK yields 6.66 per cent while in Germany, it pays 3.42 per cent.

Two reports due tomorrow will give more clues on the economy. "Very poor economic data for the UK will weigh on sterling", said Tony Norfield, head of Treasury research at ABN Amro.

Analysts expect manufacturing production in October to have fallen 0.4 per cent from September and 0.8 per cent from October last year, which would mark the first annual drop since January. Industrial production probably fell 0.2 per cent in October from the month before and 0.1 per cent in the year.

On Friday, the US dollar rose for the first time in five days against the mark and the yen after a stronger than expected US jobs report damped speculation that the Federal Reserve might lower interest rates again soon.

"This is supportive for the dollar," said Paul O'Brien, at Morgan Stanley Dean Witter Investment Management.

The jobs report "means the economy is not slowing nearly as quickly as people had thought. It's not the sort of number that will get the Fed to lower rates soon".

The dollar rose to DM1.6769 on Friday in New York, although it was still down 2 per cent on the week. It climbed to Y1,18.93, leaving it down 3.4 per cent on the week.

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