Pound falls to 4-week low against the dollar

The pound fell to its lowest level for 4 weeks yesterday versus the dollar. The US dollar increased after speculation mounted about monetary tightening from the Federal Reserve.

Fears on the economy weighed on the pound as the Office for National Statistics recently revealed that unemployment in the UK increased by 38,000 to 1.64 million in the 3 months to April.

This was just the latest in a series of negative economic data that has kept the pound on the back foot, seeing it drop from approximately $2.04 in mid-March to below $1.95.

Furthermore, the pound failed to draw support from the growing speculation of increased interest rates from the Bank of England, as data yesterday revealed inflation expectations soaring to a record high last month.

City analysts have been predicting interest rate falls to 4.5% by the end of 2008. However, they are now gambling that rates will have to increase from the current level of 5% to manage runaway inflation.

City economists said that at the very best, all hopes of an interest rate cut this year have now been snuffed out.

Economists fear that higher rates will further hurt an economy that is already suffering due to slowing growth, heightening fears about a housing market crash.

Paul Robson, currency strategist at RBS Global Banking, said there is some underlying sterling weakness. People still have concerns that the housing market and consumer spending could fall a lot further and that interest rates could come down sharply next year.

The euro was steady against the pound at 79.25 pence.

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