CURRENCIES

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The Independent Online
THE pound may rise this week on expectations that reports will show an improvement in the economic outlook. That, along with the Government's plans to cut taxes and spend more money to spur growth, could boost investor confidence in the economy and reduce the need for the Bank of England to lower interest rates.

"The pound will be able to keep its gains [and could rise further]," said Ryan Shea, an economist at First Chicago Bank. "The tone of economic growth over the last couple of weeks has been supportive of the view that the economy is not going into recession. Growth will continue to surprise more than it has in the past."

The pound rose 1.65 per cent against the dollar and 0.7 per cent against the euro in the past week. Recently it was at $1.6340 and at pounds 0.6698 per euro.

A report due on Wednesday is expected to show that the unemployment rate stood at 4.6 per cent in February, while the number of people out of work and claiming benefits rose by 1,000. A bigger-than-expected jobs gain could reinforce the bullish outlook for sterling, traders said.

Still, other reports are likely to indicate that inflation remains benign, suggesting that the central bank has some scope for reducing interest rates this year. "Reports this week will probably remind us that we're not at the trough in the interest rate cycle," said Kit Juckes, currency strategist at NatWest Global Financial Markets.

Figures due on Wednesday are expected to show that growth in wage costs slowed in the three months to the end of January while average earnings growth slowed in the three months ending December. Retail sales figures are expected on Thursday.

Some traders turned bullish on the pound last week after the Government released a Budget that includes extra spending and tax cuts. These could generate growth and reduce the need for further central bank rate reductions. "We're bullish on sterling," said David Bloom, an economist at HSBC Markets. "The economy is going to bounce back."

The outlook for the euro worsened on Friday after economic reports highlighted tame inflation and economic slowdown in Europe. These reinforced expectations for lower interest rates that could tarnish the its allure.

German and French consumer prices barely budged in February, while Italy's economy contracted in the fourth quarter. Those figures give the European Central Bank room to lower its benchmark rate from 3.0 per cent soon.

"We've only seen bad euro numbers," said Steven Post, a currency trader at Bank Artesia in Amsterdam. "I don't think this euro retreat [from low levels] will last."

June euro interest-rate futures contracts indicate that three-month yields will be 2.93 per cent by then, 12 basis points below their current level, suggesting that about a 50 per cent chance the ECB will lower the rate by 25 basis points by then.

Expectations for a euro-region rate cut deepened on Thursday with the sudden resignation of German finance minister Oskar Lafontaine, who repeatedly urged the central bank to lower rates.

Investors speculated that Mr Lafontaine's departure may give the ECB greater freedom to spur growth without jeopardising its independence or damaging its credibility.

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