Pound hits two-dollar mark

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The Independent Online

The pound hit the two US dollars mark for the first time since September 1992 today.

The prospect of higher interest rates in UK, following today's stronger than expected inflation figures, caused the spike.

Sterling, which has strengthened in the face of weaker growth expectations in the United States, was last at the two dollars level just before it was ejected from the European Exchange Rate Mechanism in 1992.

The dollar is currently trading at a 27-month low against the euro and is only marginally above the lowest point since the Eurozone came into being in 1999.

Analysts expect the dollar to come under further downward pressure during 2007, mainly because of softer US growth, the trimming of interest rates in the second half of the year and the sizeable US current account deficit.

Howard Archer, chief UK and European economist at Global Insight, said: "We believe that sterling could well remain above two US dollars for an extended period.

"In the near term, the pound is likely to be supported by expectations that UK interest rates will not only rise to 5.5% in May, but could well rise further still thereafter.

"Although we currently forecast that interest rates will peak at 5.5%, there is clearly a markedly increased possibility that they will reach 5.75% or even 6%.

The strength of the pound against the dollar is good news for Britons travelling to the United States.

Virgin Atlantic said bookings to the US have been "very strong" in recent months, with flights to New York rising by as much as a fifth over Christmas compared with the previous year.

Shoppers hoping to make the most of the favourable exchange rate will have to stick by the £145 limit on all goods, including gifts and souvenirs, from non-European Union countries or face paying UK tax.

As well as making the UK more expensive for US tourists and shoppers, the two-dollar pound will be an additional blow to exporters already faced with the surging price of raw materials.

Mr Archer added: "UK exporters to the US will obviously find their competitiveness impaired, and they will also be at a disadvantage against US exporters in third country markets. And UK companies will find their competitiveness weakened against imports from the US and other dollar-linked countries."