Pound hits 14-year high

Thursday November 30, 2006

The pound continued its advance towards the $2 level this morning, hitting fresh 14-year peaks on the back of a Nationwide housing survey which showed house prices are continuing to rise strongly.

Sterling hit a new peak of $1.958 in early morning trading, but later eased to around $1.967, still up a third of a cent.

This is the 10th consecutive day of gains for the pound, which have taken it to its highest level since Britain was forced to withdraw from the European Exchange Rate Mechanism in September 1992.

Dealers said the advance was fuelled not only by the weakness of the dollar but also by speculation that the Bank of England will push through further interest rate rises into next year.

Earlier this month the Bank raised rates by 0.25%, taking them to 5%, their highest level for five years.

But many economists think there could be further increases early next year, as the housing market continues to show strong growth.

The figures from the Nationwide show a 1.4% jump in house prices in November and put the annual increase at 9.6%, its fastest rate of growth since February 2005. Most currency traders are expecting sterling to reach the $2 level by the end of the year.

The greenback has lost 3% of its value on a trade weighted basis over the past week. It also hit a 20-month low this morning against the euro of just under $1.32.

Addressing a parliamentary committee, Bank of England Governor Mervyn King cautioned that on a trade-weighted basis, the pound has not risen nearly as far as it has against the dollar.

Mr King also said he felt the economy was continuing to rebalance with business investment strengthening while consumer spending growth has moderated from the red-hot pace of recent years.

"We are beginning to see some rebalancing and I think I would expect that to continue in future," he said.

Bank chief economist Charlie Bean said he expected the current slowdown in the US economy to be "relatively short lived".

Guardian.co.uk

Great for us in the UK if we have to buy something in dollars. Not so good when we receive payments in dollars though.