Page last updated at 15:18 GMT, Wednesday, 3 September 2008 16:18 UK

Pound dips further against dollar

Pound coins

The pound has continued to fall against the US dollar, hitting its lowest level since April 2006 on fears that the UK is heading into a recession this year.

Sterling fell to a low of $1.7771, and was recently trading at $1.7668. The weak pound weighed on shares, and the FTSE 100 stock index lost more than 2%.

Sterling has fallen sharply over the past month, down from July highs that saw one pound buying two dollars.

Wednesday's slide comes as the Bank of England starts a rate-setting meeting.

The Bank is due to give its verdict on interest rates at midday on Thursday, with most analysts expecting it to keep borrowing costs unchanged at 5%.

Measured against a basket of currencies used by the UK's main trading partners the pound is at a 12-year low.

Earlier on Wednesday, the pound had staged a small rally after better than expected figures on the service sector.

However, analysts had warned that any rebound may be short-lived because of the negative sentiment surrounding the currency.

Any rise in the pound would give "an excuse to sell sterling again at slightly better levels", said Lee Hardman, currency analyst at BTM-UFJ bank.

Difficult outlook

The US currency has been gaining ground in recent weeks and on Tuesday the euro fell to a eight-month low versus the dollar, dipping to below $1.44.

Graph

Falling oil prices, which hit a five-month low on Wednesday, have been a factor behind the dollar's rally.

Investors had bought commodities to protect against the dollar's weakness earlier this year but are now unwinding those positions - to the US currency's benefit.

Analysts also said the dollar was strengthening because the US economic outlook appeared better than the deteriorating picture in the UK and the eurozone economies.

"We're seeing a continuation of the trend where sentiment on the rest of the world is deteriorating while sentiment in the US is improving, albeit from a very low base, and the dollar is outperforming as a result," said Adam Cole of Royal Bank of Canada.

Gloomy comments over the weekend from UK Chancellor Alistair Darling, who warned that Britain was facing its toughest economic challenge for 60 years, triggered sterling's plunge on Monday, which were exacerbated when the OECD predicted that the UK would be the only major industrial country to plunge into recession this year.



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