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 user 2007-10-30 at 11:50:00 am Views: 59
  • #18864

    Pound hits 26-year US dollar high
    The UK pound has hit its highest level against the US dollar in 26 years.
    The pound has gained on the perception that US interest rates will be cut this week and UK interest rates will be left unchanged next week.When UK rates are higher than US rates, investors are encouraged to exchange dollars for pounds to benefit from better rates of return.The pound rose as high as $2.066 in earlier trading, before paring gains slightly to $2.064.

    The pound also gained against the euro.
    Many analysts expect the Federal Reserve, the US central bank, to cut interest rates by a quarter of a percentage point on Wednesday, in an attempt to limit the impact of a housing market slowdown.The Fed cut its main interest rate by half a percentage point to 4.75% last month, after problems in the housing market were seen to be spreading to the wider economy.House prices have been falling and the number of foreclosures has surged in recent months after the Fed raised rates in an attempt to slow inflation.

    Recession risks
    While inflation has been a problem in previous months, many analysts now say that the biggest worry is consumers reining in their spending.Should that happen, they argue, the US economy could splutter into a recession.The next decision from the Bank of England’s interest rate setters is due on 8 November, when they are expected to leave rates unchanged at 5.75%.The perception that there will be no change has been strengthened by comments from one of the rate setters, Kate Barker.In an interview with the Guernsey Press and Star, Ms Barker was reported to have said: “We are asking ourselves if things are so different from August and do we actually have to cut rates?”The pound is still some way off the $2.446 mark it reached in November 1980, but some analysts believe it could threaten those levels if economic conditions in the UK and US continue to diverge.James Hughes, a currency strategist from CMC Markets, said he believed the market had not yet factored in the likelihood of a further cut in US rates.

    Business impact
    While the weak dollar is good news for British travellers planning trips to the US in the run-up to Christmas, it makes the reverse trip for Americans much more expensive.The number of visitors from North America fell in the first six months of 2007.The strong pound is also inconvenient for British firms exporting goods across the Atlantic.The EEF manufacturers’ organisation said the current exchange rate was making life “more difficult” for some British companies.But it added: “A strong world economy, a shift away from price-sensitive activities and the fact that their costs are spread across the globe have cushioned UK manufacturers from its worst effect.”