Page last updated at 00:10 GMT, Saturday, 16 August 2008 01:10 UK

Sterling continues to lose ground

Pounds and dollars
Investors are favouring the dollar over the pound

The pound remained weak against the dollar in late US trading after sharper falls earlier in the session - the longest run of losses in 37 years.

Worries over the UK economy's strength saw sterling touch $1.8513 on Friday before rebounding slightly. In mid-July one pound would buy two dollars.

The pound dropped sharply on Wednesday after the Bank of England issued a gloomy assessment of the UK economy.

The dollar also strengthened against the euro, touching a six-month high.

One pound was worth $1.8646, while the euro was trading at $1.4695.

Earlier this year, the euro had climbed to $1.60.

Global trend

Analysts said that the evidence that the slowing economy was a global trend, rather than one limited to the US, meant that investors were bailing out of the euro and pound.

"The US was the first economy to hit trouble," said Tim Clayton, chief strategist at currency advisory consultancy Investica.

The US is still cheap, it's still a good holiday, but it's got a lot more expensive
David Bloom, HSBC

"Now people are realising that the UK has the same problems, if not more so, as the US."

Measured against a basket of trade-weighted currencies, the pound is now at its weakest level since 1996.

The fall in sterling could help exporters whose goods will be cheaper overseas.

But it will hurt holidaymakers who have benefitted from a strong pound when travelling to countries which use the dollar.

"The US is still cheap, it's still a good holiday, but it's got a lot more expensive," said David Bloom, an analyst at HSBC.

Rate cuts

Earlier this week the Bank of England's governor Mervyn King gave a downbeat forecast for the UK's economy, saying growth would be flat for the next year and that inflation could touch 5% before falling.

Economists had thought accelerating inflation would prevent the Bank of England from cutting rates, but the Bank's suggestion that inflation will begin to ease raised expectations of interest rate cuts and this hit the pound.

Lower interest rates mean investors get lower returns on sterling deposits, which makes the pound less attractive.

Fears about European growth have also helped the dollar bounce back from record lows against the euro.

And the dollar has been rising against most currencies following recent falls in commodity prices. Investors had been buying gold and oil to protect against dollar weakness, but they are now unwinding their positions.





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