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Last Updated: Wednesday, 31 October 2007, 21:54 GMT
Pound powers past weaker dollar
Pound and dollar

The pound and euro strengthened their positions against the US dollar, with sterling once again rising to its highest levels since 1981.

The gains were fuelled by the Federal Reserve's decision to trim US interest rates for a second time in two months.

The pound rose to a 26-year high of $2.08, while the euro touched $1.45 - its highest point since its 1999 debut.

Traders are selling the dollar with the view a Fed rate cut from 4.75% to 4.5% will help keep global growth on track.

Concerns over the summer that the world's economy could be destabilised by a weaker US economy prompted a sell-off in risky assets, such as shares.

But since September, when the Fed cut the key interest rate from 5.25% to 4.75%, investors have regained their appetite for risk, comforted that the rate-setting body will intervene if need be to limit serious economic damage caused by the sagging housing market.

If there is chronic dollar weakness we could see the pound move above $2.4546, which was last seen in 1980, and before that in 1973
Nicolle Elliott, technical analyst, Mizuho Corporate Bank

The dollar reached a record low for at least the fourth time in the past two weeks, trading at $1.4478, while the Australian dollar, the South African rand, the Canadian dollar and Brazilian currency all made headway against the greenback.

Meanwhile, spot gold prices thundered past $800 an ounce, a level not seen since 1980, and US oil prices surged once again to a record high above $94.

Even though the Fed indicated after its meeting that further rate cuts were not on the cards, in order to balance the possibility of weaker growth with inflation risks, analysts took the view that comments from the policy makers were not enough to stem negative dollar sentiment.

"The dollar at this point probably continues going down," said Doug Roberts, chief investment strategist at New Jersey-based Channel Capital Research.

Economic woes

The US has been beset by problems in the housing market, adding to a largely consensus view that a rate cut was very likely as the Fed tries to stimulate the market and economy.

By contrast, the UK housing market has been much more robust and a report from mortgage lender Nationwide on Wednesday showed that prices rose sharply in October.

That made it even more likely that the Bank of England would keep UK rates on hold at 5.75% at its meeting next week, analysts said.

Taken together with a cut in US rates from 4.75% to 4.5%, this makes the pound more lucrative than the dollar for investors.

"If there is chronic dollar weakness, we could see the pound move above $2.4546 which was last seen in 1980, and before that in 1973," said Nicolle Elliott, technical analyst at Mizuho Corporate Bank.

Other analysts are not as bullish, but still forecast the pound gaining strength against the dollar well into 2008, while currency strategists at JP Morgan believe that sterling will remain above the $2 mark for a while yet.

The Fed is under pressure to reduce US interest rates further to help boost the struggling housing market.

Even though government data out on Wednesday showed that economic growth was still strong in the July to September period at 3.9%, analysts warn that the numbers for the fourth quarter will be much worse.

A sour note was already struck on Tuesday when a key report showed that US consumer confidence declined for the third month in a row in October to its lowest level in two years.

Pound hits 26-year US dollar high
30 Oct 07 |  Business
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

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