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Pound hits 26-year US dollar high Pound hits 26-year US dollar high
(30 minutes later)
The UK pound has hit its highest level against the US dollar in 26 years.The UK pound has hit its highest level against the US dollar in 26 years.
The move comes as investors bet that the US Federal Reserve will cut interest rates later this week. The pound has gained on the perception that US interest rates will be cut this week and UK interest rates will be left unchanged next week.
That would help strengthen the pound as higher interest rates in the UK would attract inflows of funds keen to benefit from better rates of return. When UK rates are higher than US rates, investors are encouraged to exchange dollars for pounds to benefit from better rates of return.
The pound rose as high as $2.066 in earlier trading, before paring gains slightly to $2.064. The pound also gained against the euro. The pound rose as high as $2.066 in earlier trading, before paring gains slightly to $2.064.
Many analysts expect the Federal Reserve, the US version of a central bank, to cut interest rates by a quarter of a percentage point on Wednesday in an attempt to limit the impact of a housing market slowdown. The pound also gained against the euro.
The Fed has already cut its main interest rate to 4.75% last month after problems in the housing market were seen to be spreading to the wider economy. Many analysts expect the Federal Reserve, the US central bank, to cut interest rates by a quarter of a percentage point on Wednesday, in an attempt to limit the impact of a housing market slowdown.
The Fed cut its main interest rate by half a percentage point to 4.75% last month, after problems in the housing market were seen to be spreading to the wider economy.
House prices have been falling and the number of foreclosures has surged in recent months after the Fed raised rates in an attempt to slow inflation.House prices have been falling and the number of foreclosures has surged in recent months after the Fed raised rates in an attempt to slow inflation.
Recession risks
While inflation has been a problem in previous months, many analysts now say that the biggest worry is consumers reining in their spending.While inflation has been a problem in previous months, many analysts now say that the biggest worry is consumers reining in their spending.
Should that happen, they argue, then the US economy could splutter into a recession. Should that happen, they argue, the US economy could splutter into a recession.
The next decision from the Bank of England's interest rate setters is due on 8 November, when they are expected to leave rates unchanged at 5.75%.
The perception that there will be no change has been strengthened by comments from one of the rate setters, Kate Barker.
In an interview with the Guernsey Press and Star, Ms Barker was reported to have said: "We are asking ourselves if things are so different from August and do we actually have to cut rates?"