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Sterling losses gather momentum Sterling losses gather momentum
(19 minutes later)
The pound has fallen further against the dollar, hitting its lowest level in almost two years amid fears the UK will fall into recession.The pound has fallen further against the dollar, hitting its lowest level in almost two years amid fears the UK will fall into recession.
Sterling touched its lowest level since October 2006 at $1.8617. Sterling touched its lowest level since October 2006 at $1.8617 but later bounced back to $1.8736.
Measured against a basket of trade-weighted currencies, the pound is now at its weakest level since 1996.Measured against a basket of trade-weighted currencies, the pound is now at its weakest level since 1996.
The pound dropped sharply on Wednesday after the Bank of England issued its gloomiest assessment yet of the health of the UK economy. The pound dropped sharply on Wednesday after the Bank of England issued a gloomy assessment of the UK economy.
The fall in sterling will hurt holidaymakers who have benefitted from a strong pound when travelling abroad - and make it more expensive for people to buy second homes abroad. The fall in sterling will hurt holidaymakers who have benefitted from a strong pound when travelling overseas- and make it more expensive for people to buy second homes abroad.
However, it could help exporters whose goods will be cheaper overseas.However, it could help exporters whose goods will be cheaper overseas.
The Bank's governor Mervyn King said economic growth would be flat for the next year or so and that inflation would rise to 5% or above before falling.The Bank's governor Mervyn King said economic growth would be flat for the next year or so and that inflation would rise to 5% or above before falling.
That could eventually help boost the economy. But with domestic demand weak, a revival of exports could help the economy and limit job losses.
Rate cutsRate cuts
Economists had thought 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.Economists had thought 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.
We have long argued that sterling has been significantly overvalued in recent years Jonathan Loynes, Capital Economics
Lower interest rates mean investors get lower returns on sterling deposits, which makes the pound less attractive.Lower interest rates mean investors get lower returns on sterling deposits, which makes the pound less attractive.
Simon Derrick, currency strategist at Bank of New York Mellon, called pound's fall this week a "dramatic collapse" that recalled the aftermath of sterling's ejection from European Exchange Rate Mechanism (ERM) in 1992. Simon Derrick, currency strategist at Bank of New York Mellon, described the pound's fall this week a "dramatic collapse" that recalled the aftermath of sterling's ejection from European Exchange Rate Mechanism (ERM) in 1992.
Expectations of lower interest rates have driven sterling lower
However, he said the currency's slide should begin to ease.However, he said the currency's slide should begin to ease.
"Even within the most ferocious sterling downtrends in the past, significant corrections emerged in the middle of the moves," he said."Even within the most ferocious sterling downtrends in the past, significant corrections emerged in the middle of the moves," he said.
But Jonathan Loynes, chief European economist at Capital Economics, thinks the pound could fall as far as $1.65 by the end of 2009.
"We have long argued that sterling has been significantly overvalued in recent years," he said.
Deteriorating outlooks
Recent official figures have already shown the UK is struggling with high inflation and faltering growth.Recent official figures have already shown the UK is struggling with high inflation and faltering growth.
Fears about European growth have also helped the dollar bounce back from record lows.Fears about European growth have also helped the dollar bounce back from record lows.
The US economy is still reeling from the credit crisis but analysts say the deteriorating outlook elsewhere in the world has given the dollar a boost.The US economy is still reeling from the credit crisis but analysts say the deteriorating outlook elsewhere in the world has given the dollar a boost.
Falling commodity prices have also supported the US currency. Investors had bought gold and oil to protect against dollar weakness and are now unwinding their positions.Falling commodity prices have also supported the US currency. Investors had bought gold and oil to protect against dollar weakness and are now unwinding their positions.
The euro was trading at $1.4910 on Thursday, slightly above the 6-month low of $1.4815 struck this week. Earlier this year, the euro was trading at $1.60.The euro was trading at $1.4910 on Thursday, slightly above the 6-month low of $1.4815 struck this week. Earlier this year, the euro was trading at $1.60.
The euro has been further undermined by the military conflict in Georgia.The euro has been further undermined by the military conflict in Georgia.