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Pound powers past weaker dollar Pound powers past weaker dollar
(about 1 hour later)
The pound strengthened its position against the US dollar, with sterling again rising to its highest levels since 1981. 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 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 after rising earlier in anticipation of the move, which had been widely expected. The pound rose to a 26-year high of $2.08, while the euro touched $1.45 - its highest point since its 1999 debut.
The Fed cut rates from 4.75% to 4.5% even after good US economic data. 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.
The euro has also been gaining against the US currency, and touched $1.4467, the fourth-highest level in its history. 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 $1.4491, 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 woesEconomic 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.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 market has been much more robust and a report on Wednesday showed that prices rose sharply in October. 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.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.
Dealers are showing no hesitation in selling the dollar against the euro Tsutomu Soma, Okasan Securities.
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.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.
The Fed is under pressure to reduce US interest rates further to help boost the struggling housing market, amid growing signs of weakness in the wider economy. "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.
A key report showed on Tuesday that US consumer confidence declined for the third month in a row in October to its lowest level in two years. 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 cut its benchmark interest rate to 4.75% from 5.25% in September. The Fed is under pressure to reduce US interest rates further to help boost the struggling housing market.
The latest UK house price data came from mortgage lender Nationwide. 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.
It found that house prices rose at an annual rate of 9.7% in October, up from September's 9% gain. 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.
The pound still has some way to go before it beats the $2.40 highs seen in 1980 and 1981.