CURRENCIES

THE pound is expected to fall this week on speculation that declines in world equity markets will prompt interest rate cuts by the Federal Reserve and other industrialised countries.

The pound is also heading lower, analysts said, after a batch of economic reports last week confirmed that inflation is in check and economic growth is slow enough for the Bank of England to ponder an interest rate cut. Without any big economic reports this week, however, investors will focus on the global turmoil.

"We're in the lap of external factors yet again," said Jeremy Stretch, a currency strategist at NatWest Markets. With no economic data, "We're left with official pronouncements on the global environment."

World equity markets were falling last week on concern that slower growth worldwide is stunting corporate earnings. Analysts said more sharp declines might prompt the Fed and other members of the G7 nations to lower rates to give the global economy a boost. Lower UK rates would hurt the pound as they lower the return on sterling deposits.

The pound has weakened almost 4 per cent against the mark since late August on expectations of rate cuts as growth slowed in wages and prices and the manufacturing industry fell into recession. Bank of England Governor Eddie George's comment last week that the central bank would cut rates if inflation fell "significantly below" the Government's 2.5 per cent target also pushed the pound lower.

But at the end of last week the pound rose after investors concluded that the currency had weakened too much, given expectations that interest rates are not falling soon.

"The rate expectations were overdone," said James Barty, chief economist at Deutsche Bank. "Sterling has come down a long way, and it's not unusual for it to stall after a big drop."

While the pound strengthened on Friday, "the medium-term trend is for it to get weaker," Mr Stretch said. "The market anticipates lower rates by year-end."

The pound rose to DM2.8503 from DM2.8398 late Thursday. Against the dollar, it fell to $1.6811 from $1.6827.

The pound rose even as the Prime Minister, Tony Blair, told union leaders that he would like interest rates to come down next month or in November at the latest.

The Government reported last week that growth in wages slowed to an annual rate of 4.7 per cent in the three months to July, from 5.0 per cent in the second quarter. The underlying rate of inflation rose 0.4 per cent in August, taking the increase to 2.5 per cent for the year. The Government targets a 2.5 per cent rate. Last month was the first time it was on target since January.

The dollar rose against the yen on Friday on speculation that a plan to reform Japan's crippled banking system will not revive the Japanese economy soon.

"While this is good news, the outlook for Japan is still negative," said Mark Parry, at Hill Samuel Asset Management. "The Japanese economy is not going to change direction. We've had a negative view on the yen for some time, and still do," he said.

The dollar was at Y132.85 after dipping as low as Y131 after the plan was announced. The dollar fell to DM1.6905 on speculation that the Federal Reserve may cut interest rates before the Bundesbank, undercutting the dollar's allure compared with the mark.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Ashdown Group: Contracts Executive - City of London

£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen