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Last Updated: Tuesday, 3 July 2007, 08:59 GMT 09:59 UK
Rate talk propels pound's rally
Man sifting through sterling and dollar notes

The pound has edged ahead to a new 26-year high against the US dollar as investors look ahead to an expected UK interest rate rise later this week.

In early trade in Europe, one pound touched $2.0181.

Analysts believe the Bank of England is almost certain to raise interest rates to 5.75% on Thursday in an attempt to keep inflation under control.

Expectations of higher rates make the pound popular among currency investors, as they can gain a higher return.

By contrast, last week the US Federal Reserve again kept its interest rate on hold - and there are predictions that rates will remain stable amid a US housing slowdown.

The dollar was also weaker against the euro, although the European Central Bank is tipped to peg its benchmark rate at 4% this week.

Mixed impact

While the stronger pound is good news for British tourists hunting for bargains in the US, it does not augur well for UK exporters, who could suffer as their goods become more expensive.

Last month, Bank of England minutes showed that the main rate-setting committee voted by five members to four to freeze rates at 5.5%.

Among the four members to vote for a quarter point rate rise in June was Bank of England governor Mervyn King.

The Bank chief has repeatedly expressed his desire to bring back consumer price inflation to below the government's 2% target. In May it fell to 2.5% from 2.8% the previous month.

Some analysts expect UK interest rates to be as high as 6% by the end of this year.

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