Sterling hit $1.5568 at one point, its lowest rate since September 1996. According to market rumour, the fall was driven by a glimmer of hope that the Bank of England would unexpectedly cut rates after its meeting today
But analysts dismissed talk of a rate cut, saying sterling had suffered in the face of the strong dollar, which made giant strides against European currencies yesterday and renewed fears of another Fed rate hike.
A large US bank in London was said to be a major seller of sterling for the second day running and the pound's fall followed its slide on Tuesday to $1.5628, its lowest rate for 32 months. Sterling also faded against the euro, losing almost 50p to 65.56p and its index dipped 0.4 to 103.5 against a basket of other currencies.
Jim O'Neill, chief currency economist at Goldman Sachs, said sterling had fallen 2.6 per cent since the last rate cut eliminated the differential between US and UK rates.
"Despite the euro's continued poor performance, the pound has actually weakened against the euro for the first time for some time and it looks as if we have had some genuine weakness," he said.
Goldman Sachs believes rates will stay unchanged today but will be cut later this year as inflation continues to fall.
Kevin Gardiner of Morgan Stanley, which also forecast no rate change, said implied three-month interest rates indicated rates could rise to 6.5 per cent by 2000. "The interest rate outlook is very interesting because if the sterling index fell then I think rates would go upwards quite sharply," he said.
Robert Barrie of CSFB said rises of that order were unlikely given the economy was not going to grow quickly.
Outlook, page 21