Pound hits fresh high after rate decision

The pound rose to a fresh 26-year high against the dollar on Thursday after the Bank of England’left UK interest rates on hold at 5.75 per cent.

The pound rose 0.3 per cent to $2.1080 against the dollar, surpassing the peak of $2.1070 it hit on Wednesday, but was little changed at £0.6956 against the euro.

The decision was was widely expected by the market given recent hawkish comments from members of the Bank of England’s monetary policy committee.

However, some recent soft UK economic data, including a weak Halifax house price survey released on Thursday, had seen some analysts look for a cut in rates.

“We believe there will be scope for lower rates from the first quarter of 2008,” said James Knightley at ING Financial Markets.

“With important surveys suggesting growth has peaked in the UK, sterling strength and a deteriorating US and eurozone outlook hurting exporters and lead housing indicators pointing to a downturn, economic activity looks set to slow markedly in 2008.”

Meanwhile, the euro edged 0.2 per cent higher against the dollar to $1.4661, within touching distance of the record peak of $1.4730 it hit on Wednesday, as traders awaited the European Central Bank’s decision on eurozone interest rates, due at 12.45GMT.

While analysts were expecting the ECB to keep interest rates on hold at 4 per cent, the main focus was expected to be on the post-decision press conference from Jean-Claude Trichet, ECB president, for any reference to the recent sharp appreciation of the euro, which has risen over 4 per cent against the dollar in the past month.

However, Mitul Kotecha at Calyon said he doubted that President Trichet would deviate much from the his October statement, in which he made no specific comment to the euro’s strength.

“Although we look for the ECB to remain on hold over coming months, the statement is set to keep euro/dollar under upward pressure as it builds up to test $1.50 over coming weeks,” he said.

Meanwhile, the dollar consolidated after an aggressive sell-off on Wednesday, sparked by comments from a Chinese official, who suggested that the country should diversify its massive $1,430bn foreign exchange stockpile away from the dollar.

Analysts said the reaction to the comments - which hardly presented a new policy stance from China - was more a reflection of increasing worries over the health of the US financial sector in the wake of the crisis in the subprime mortgage market.

The dollar recovered some ground later in the session as short-term investors booked some profits, but analysts said sentiment towards the currency remained fragile.

“The dollar managed to retreat from the edge of the abyss,” said David Watt at RBC Capital Markets. “But it still faces enormous hurdles before it can enter a sustained recovery.”

The dollar eased 0.2 per cent to SFr1.1314 against the Swiss franc, lost 0.1 per cent to C$0.9277 against the Canadian dollar but was 0.1 per cent higher at Y112.88 against the yen.