Pound at fresh high
The pound has been strengthened by expectations that an interest rate cut is not imminent
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Wednesday, 31, Oct 2007 12:15
The pound hit a fresh 26-year high against the dollar today, amid expectations of an interest rate cut in the United States.
Analysts said sterling was strengthened further by new figures showing a rise in UK house prices in October, with economists having stressed that the development means the Bank of England is unlikely to implement a similar rate cut on this side of the Atlantic in November.
Higher interest rates in the UK, against those in the US, would make the pound more attractive than the dollar to investors seeking to make better returns on their money.
Predictions that the US Federal Reserve will cut its benchmark interest rate later today saw the pound hit a fresh high of $2.0743 against the dollar in early trading.
The Fed, which previously cut US interest rates from 5.25 per cent to 4.75 per cent in September, is under pressure to give a boost to the country's economy after a new report revealed yesterday that confidence among American consumers has fallen to the lowest level in two years.
Meanwhile in the UK, lender Nationwide said today that UK house prices climbed by 1.1 per cent in October - the fastest rate of increase recorded since June.
While economists have maintained their view that the housing market is likely to slow in the long-term, they have said the data makes it improbable that the benchmark interest rate in the UK will be slashed from its current level of 5.75 per cent when Bank of England policymakers meet next month.
Today's subsequent strengthening of the pound followed the highs achieved by sterling against the dollar yesterday, when the UK's currency was boosted by suggestions from monetary policy committee (MPC) member Kate Barker that recent turmoil on the financial markets had not yet persuaded her that the cost of borrowing had reached too high a level.
But analysts say that while the strength of the pound will bring cheer to UK consumers visiting the US, it is likely to cause difficulties for exporters.
"Those who are planning to take winter breaks in the USA will be pleased to find that their pound will go further towards their Christmas shopping," said Barry Naisbitt, chief economist at the Abbey.
"As with many things in economics, however, there is a balance to be struck. UK exporters looking to sell goods in the US will find that the stronger value of sterling could reduce their sales growth," he warned.