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Pound still above $2 despite fall

The pound has eased slightly against the dollar but still remains above $2 and close to 26-year highs.

Sterling slid back to $2.002 after passing $2.010 on Wednesday, its highest level since 1981. Analysts said that UK inflationary pressures and the likelihood of an imminent interest rate rise probably would keep the pound above $2 for now. The Bank of England is widely expected to lift rates to 5.5% in May, and a further rise is seen later in the year. The US dollar also rallied slightly against the euro, bouncing back from record lows. The pound has strengthened against the dollar as the contrast between the robust UK economy, underpinned by the housing market and highlighted by the accelerating price growth, and the US slowdown becomes more pronounced.

Recent indicators have suggested that a further rise in UK interest rates is not far away. Annual consumer price inflation rose above 3% last month while average earnings rose at an annual rate of 4.6% in the quarter to February, the fastest rate for almost three years. Meanwhile, minutes from the Bank of England's last interest rate meeting showed that two of nine members voted for an immediate rate rise. Higher interest rates increase demand for a currency as investors look to buy into assets that offer higher yields.

By contrast, many analysts are calling for a rate cut in the US to help give the economy an extra push. One analyst said the prospect of a tightening in UK monetary policy was like to keep the pound trading above $2 in the near future. "We think it will stay over there now," said Martin McMahon, a foreign exchange strategist from Credit Suisse. "But we do not think it will charge on through to $2.05/$2.06 any time soon." The weak dollar gives British visitors to the US more spending power and has led to a sharp increase in the number of people booking flights in recent months. However, it makes UK produced goods more expensive and may hurt exporters. (BBC NEWS)