Signs of stalling growth and tame inflation have prompted the Bank of England's Monetary Policy Committee to cut rates for three consecutive months, taking the benchmark rate to 6.25 per cent and weakening the return on pound deposits.
"The pressure from interest rates won't be helpful for sterling," said Simon Rubinsohn at Capel-Cure Sharp. He expects the pound will decline to DM2.70 over the next six months. With inflation subdued, he said, "it leaves little to stop the MPC from cutting rates further". On Friday, the pound rose to DM2.7989, although it's still down about 6 per cent against the mark this year on expectations that rates will fall further and faster than German rates. It rose to $1.6803, near an eight-week high. "The pound will struggle to make progress above DM2.79 in the days ahead," said Dan Katzive, a currency economist at MMS International. "People are looking at more MPC easing" early next year, he added.
An economic growth report, slated for release on Monday, is likely to keep intact the case for lower rates. Economists expect it to show the economy grew 0.4 per cent in the third quarter, unchanged from the Government's previous estimate - an annual increase of 2.3 percent.
The dollar fell against the yen and mark on expectations that the US House of Representatives will vote to impeach President Clinton. "Holding US assets is risky when you weaken the US presidency," said Doug York, at Campbell & Co. He predicted the dollar could fall to Y108 and DM1.60 by the year-end.
The US currency fell to Y115.68 on Friday from Y116.35 on Thursday and to DM1.6654 from DM1.6675. It pared some losses after Iraq's President Saddam Hussein vowed in a national television address that he wouldn't give in after two days of US-led air strikes against Iraq.
"Things aren't cooling down in the Middle East," said John Cholakis, a currency trader at Dai-Ichi Kangyo Bank. "Saddam doesn't plan to back down. Things are going to escalate, so the dollar is benefiting as a safe haven."
Saddam said there would be "no compromise" and urged Iraqis to "pursue the resistance, strike in the name of God".
The US currency was little changed against the European currency unit, with the ecu trading at $1.1793 from $1.1782. The ecu will be swapped one-for-one with the euro from January.
The House of Representatives began debating impeachment on Friday as traders took the view that with two dozen previously undecided Republicans in the House now supporting impeachment, it was likely that President Clinton will be tried in the Senate. "The market has priced in that Clinton will be impeached," said David Factor, at American Express Bank. "Prospects for a political vacuum are weighing on the dollar."
Traders said an impeachment may not drive the dollar down much further since that outcome has already been factored into the dollar's value.