Pound hits 7-year low

US tourists will find their dollar goes further in the UK

The pound plunged to a seven-year low against the dollar on Wednesday.

One pound bought less than $1.44, the lowest level since 1993. On Tuesday, the currency had slipped to $1.46, a six-year low.

Analysts say the weaker currency can be attributed to the growing belief that UK interest rates have peaked at 6%.

The weaker currency has been welcomed by manufacturers, who may now find it easier to sell their goods abroad.

"Obviously, it is nice to see a weakening in the strength of sterling," a spokesman for Matsushita Electric Europe said.

"From the manufacturers' viewpoint however a trend of just a few weeks in itself is not going to make much difference. What we are looking for is a long term trend of sterling."

Lure of the dollar

Analysts cited a mix of reasons for the currency's weakness.

Some say the growing belief that the Bank of England's monetary policy committee will leave interest rates on hold at 6% has prompted investors to sell the currency in low-volume, end-of-summer trade.

Recent data from the UK has reinforced the impression that inflation is under control, making it unlikely that the MPC will raise interest rates in the near term.

Higher interest rates encourage investors to put their money in UK assets, generally boosting the pound.

At 6.5%, US rates are currently half a percentage point higher than UK rates, making it more appealing for investors to hold dollars instead of pounds.

Euro weakness

Investors are also more likely to hold dollars instead of the euro, which remains weak against the US currency despite the prospect of a rate increase this week which could put rates up to 4.75%.

These hopes are, however, not enough to boost the euro against the strong dollar.

The euro dipped to a three-month low of 88 cents before bouncing back to 89 cents in early afternoon trade.

Many investors remain unconvinced that a strong euro is sustainable.

News that Swiss banking group Credit Suisse is to buy US stockbroking group Donaldson Lufkin Jenrette for $11.5bn also prompted investors to sell the euro.

It was seen as the latest evidence of European capital heading to the US, where companies and investors believe the returns on their investments will be greater.