Pound tumbles to six-year low

The pound tumbled last night to its lowest level since before Labour came to power six years ago, as the prospect of a cut in interest rates to boost the flagging economy prompted waves of selling on the foreign exchanges.

On the eve of the Bank of England's monthly decision on borrowing costs, sterling suffered its biggest one-day fall in more than a year to end down, across the board, against the dollar, the yen and the euro.

Dealers said the pound had been under pressure since February's surprise reduction in interest rates to a 48-year-low of 3.75%, and the possibility of a further easing to 3.5% had discouraged investors from holding UK assets.

City economists were last night evenly split on whether the Bank's monetary policy committee will cut rates today, with some arguing that the recent hefty fall in the value of the pound may be the decisive factor in keeping borrowing costs on hold.

The chances of a cut in UK rates were considered to be higher than a move today from the European Central Bank, which has set a 2.5% rate for the eurozone.

In a volatile day's trading yesterday, sterling's trade-weighted exchange rate against a basket of global currencies fell from 98.9% of its 1990 value to 97.3%, a level last seen in March 1997.

The pound lost five yen against the Japanese currency, 1% of its value against the US dollar, and finished the day close to its lowest level in the four years since the launch of the euro.

Analysts said that measured against the now defunct German mark, sterling was now trading well below the DM2.7780 level - the bottom of its permitted band during the two-year spell inside the exchange rate mechanism that ended on Black Wednesday in September 1992.

Nick Parsons, a currency economist with Commerzbank, said: "It's ironic that a decade ago, the government was raising interest rates to 15% in order to defend the pound at these levels, and now there's talk of rates being cut to 3.5%. It shows how much better the management of the economy is now."

Despite falling almost 10% against the euro since the start of the year, Mr Parsons said there was no sense of a "sterling crisis" in the City and that he expected a cut in rates from both the MPC and the ECB.

Some members of the MPC may be reluctant to cut rates for fear that the sharp fall in sterling will push up the cost of imports and trigger claims for higher wages in compensation, thereby putting at risk the government's 2.5% inflation target.

Last night the pound finished just off its lows against the single currency, at about 71.20p per euro, within half a penny of the record low reached shortly after the euro's launch in January 1999.

While much of sterling's recent weakness against the euro has been driven by the single currency's rampant gains against the dollar, the pound's two cent slide to $1.5905 against the greenback yesterday suggested to dealers that there were specific, British-related factors behind sterling's weakness.

Elsewhere on the foreign exchanges, the euro paused for breath after its recent strong rise against the dollar, which has left it within four cents of the $1.17 rate at which it began trading in 1999. Dealers believe that hints from the Federal Reserve that US interest rates may have further to fall will lead to a resumption of the dollar's fall.

America's central bank left US interest rates on hold at a four-decade low of 1.25% on Tuesday, but signalled that it is concerned about the risks of inflation. Investors took that as a signal that rates will come down even further, possibly at the Fed meeting in June.