Pound hits 26-year high against dollar

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The Independent Online

The pound reached a new 26-year peak against the dollar today as interest rate expectations on both sides of the Atlantic drove the currency higher.

Sterling soared to levels not seen since early 1981 - at more than 2.06 US dollars - as hopes of an imminent cut in interest rates faded in the UK, coupled with forecasts of further rate reductions in the US.



The pound eased quickly back from the 26-year record, but experts said there was further potential strength for sterling with the US interest rate decision looming tomorrow.













Currency expert James Hughes of CMC Markets said: "We'll probably see the pound test these levels a few times today ahead of the interest rate decision tomorrow.

"Potential strength tomorrow on the decision depends if a cut has already been fully factored in, but I don't think it has yet."



The pound still has some way to go before it beats the highs seen in 1980 and 1981, when sterling reached more than 2.40 US dollars.



On November 5 1980, the pound hit 2.446 against the dollar, before which the highest levels were seen only in the early 1970s, when it reached 2.644.



But Mr Hughes said it was possible the pound could break through that barrier given the current interest rate climate in the US and UK, alongside fears over the US economy.



The US Federal Reserve is widely expected to trim rates by 0.25% tomorrow, just a month after cutting rates by a higher-than-expected 50 basis points.



Data on the country's slowing housing market has added to the view that a cut is on the cards.



Meanwhile in the UK, previous expectations for a rate decrease from the Bank of England as early as November have been scaled back after inflation and economic growth figures have provided little cause yet for a move down.



Economists are now forecasting rates to be reduced next year and comments today from Kate Barker, one of the Bank's rate setters, lent support to the predictions.



The Monetary Policy Committee (MPC) member reportedly said she felt the economy would only slow rather than see any serious decline, suggesting there was not yet a compelling case for a cut.



The dollar's weakness will be good news for UK travellers visiting America, but manufacturers today said they were struggling with the strong pound.



Steve Radley, chief economist at manufacturers organisation EEF, said: "A weak dollar is making life more difficult for companies and there are signs emerging that some companies are finding it more of a challenge.



"But a strong world economy, a shift away from more price-sensitive activities and the fact that their costs are spread across the globe have cushioned UK manufacturers from its worst effect."

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