Pound Trades Near 26-Year High Against Dollar on BOE Rate View

Quoted from Bloomberg.com: Currencies

The British pound traded near a 26- year high against the dollar and rose against the euro on speculation the Bank of England will leave interest rates unchanged at its Nov. 8 meeting.

The pound pared earlier advances as stocks in Europe and U.S. slumped, fanning risk aversion. The currency rose to its highest since May 1981 against the dollar a day after the Federal Reserve cut its benchmark interest rate. Central bank policy makers ``cannot afford to relax'' on inflation, Bank of England Chief Economist Charles Bean said yesterday.

``Independently, sterling is still relatively strong,'' said Adam Cole, head of global currency strategy at Royal Bank of Canada in London. ``The market chose to focus on Bean's hawkish statements, moving current sentiment away from lower U.K. rates.''

The pound traded at $2.0808 as of 2:46 p.m. in London, from $2.0798 late yesterday. It reached $2.0851, the strongest since May 18, 1981. Against the euro, the pound strengthened to a four- week high of 69.33 pence, from 69.66.

Cole predicts the pound will end the year at $2.09, higher than the $2.03 median forecast of 42 strategists and economists compiled by Bloomberg.

The FTSE 100 stock index fell 2.2 percent and the Dow Jones Industrial Average fell or 1.6 percent

At 5.75 percent, the Bank of England's main interest rate is the highest among the Group of 10 nations, making it a target currency for carry traders.

Interest Rates

The U.K. central bank has raised the cost of borrowing three times this year by a quarter percentage point. The bank will keep its benchmark rate unchanged at its next meeting on Nov. 8, according to the median estimate from 37 economists in a Bloomberg News survey.

``There's going to be a significant impact from energy prices going forward in the early part of next year,'' Bean said in London. ``We're cautious about prospects for inflation,'' and it is ``a bit troubling'' that measures of consumer price expectations have yet to follow the inflation rate down.

Expectations for lower interest rates in the future priced into markets already represent a ``de facto loosening'' of monetary policy, Bean said in comments after his speech.

He is the fourth policy maker since Governor Mervyn King spoke on Oct. 9 to suggest that the rate will remain on hold.

`Watch And See'

King said the rate-setting committee is gauging the effects of higher credit costs on the economy while keeping up their guard on inflation. David Blanchflower said yesterday the bank is taking a ``watch and see'' approach on whether to lower the U.K.'s benchmark rate and his colleague Kate Barker signaled on Oct. 30 it isn't ready to cut borrowing costs.

U.K. manufacturing expanded at the slowest rate in almost a year in October, an industry report showed. An index based on a survey of more than 600 manufacturers by the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland Group Plc fell to 52.9 from a revised 54.7 in September, Reuters said today.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net