BBC News
watch One-Minute World News
Last Updated: Tuesday, 30 October 2007, 22:30 GMT
Pound hits 26-year US dollar high
Pound coin

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, while 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.

At one point the pound touched $2.070, before paring gains to $2.067, while the dollar sank to a new euro low.

The last time the pound was at these sorts of levels was 5 November, 1980, when it reached $2.446.

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% from 5.25% last month, after problems in the housing market were seen to be spreading to the wider economy.

The move sent the greenback in a downward spiral against the euro, sliding to a new record low on Tuesday at $1.4444, its third record low in as many days.

Recession risks

House prices in the US have been falling and the number of foreclosures has surged in recent months after the Fed spent almost two years between 2004 and 2006 raising rates in an attempt to slow inflation.

While inflation fears have been simmering in previous months, mainly stoked by the surging oil price, 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 Bank's policy makers, 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."

Graph showing the pound against US dollar

Dollar plumbs new low versus euro
29 Oct 07 |  Business
Fed cuts interest rate to 4.75%
18 Sep 07 |  Business
Credit crisis 'still poses risks'
25 Oct 07 |  Business
US economy 'heading for slowdown'
05 Sep 07 |  Business

The BBC is not responsible for the content of external internet sites

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific