Housing data prompts fresh dollar weakness

The pound rose to within a whisker of its recent 26-year high during trading yesterday. At one stage the pound reached $2.006, almost matching May's high watermark of $2.013.

Given the continuing pessimism surrounding the American currency - with the mood gloomier than usual after yesterday's disappointing data on the US property market - analysts believe it is only a matter of time before sterling finds itself firmly in territory last seen only by those with very long memories. The pound ended the day at $1.9974.

But this is much more a story of American weakness than British strength. Confirming the US is enduring a residential property slump - with all the negative connotations that has for consumer confidence, spending and growth - yesterday's figures showed that existing home sales last month were the worst in almost four years.

Such growing fragility in the American economy has increased the likelihood that the Federal Reserve will hold or cut interest rates in the medium term, whatever happens at the FOMC meeting on Thursday.

If so, then the dollar's weakness will become more apparent. But cutting rates also leaves the dollar "vulnerable" to a drop in investment inflows that the US relies on to fund its trade and current account deficits, according to the Bank for International Settlements' latest annual report. The US currency has been supported by purchases of Treasuries by overseas investors, who own a record 80 per cent of the notes due in three to 10 years, according to research from HSBC.

"The dollar clearly remains vulnerable to a sudden loss of private-sector confidence," Swiss-based BIS said in its 77th annual report issued yesterday.