Pound weakens on inflation news

The pound weakened Tuesday after the Mervyn King, the governor of the Bank of England, said in a letter to the Chancellor of the Exchequer that inflation in the UK will peak soon and then slow down in 2009, spurring speculation that the Bank will cut interest rates soon.

Mr. King wrote the letter, as required by law, to explain why inflation in the UK has stayed more than 1 percent above the government target for more than three consecutive months.

In late morning trade in New York, the pound traded at 79.68p to the euro, while it took $1.7767 to buy a pound.

The South African rand declined as well as investors sold higher-yield currencies after troubled US insurer American International Group’s (NYSE: AIG) credit rating was cut by two ratings agencies and as gold and platinum prices fell.

The rand most recently traded at R8.1845 to the US dollar and at $11.587 to the euro.

Investor selling of higher-yielding currencies, triggered by a second straight day of significant declines in global equities markets, also weakened the Australia and New Zealand dollars.

The Aussie was worth ¥82.35 while it took 79.29 cents US to buy an Australian dollar and the kiwi was worth ¥67.9 and 65.81 cents US at late morning in New York.

The US dollar, meanwhile, strengthened on speculation that the US government could bail out AIG.

The greenback traded at $1.4157 to the euro at just past 11 a.m. in New York while the US currency was worth ¥104.93.

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