Pound hits new high against dollar

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Sterling soared to levels not seen since early 1981 - at more than 2.06 US dollars - as hopes of an imminent cut in interest rates faded in the UK, coupled with forecasts of further rate reductions in the US.

The pound eased quickly back from the 26-year record, but experts said there was further potential strength for sterling with the US interest rate decision looming on Wednesday.

Currency expert James Hughes of CMC Markets said: "We'll probably see the pound test these levels a few times ahead of the interest rate decision on Wednesday.

"Potential strength tomorrow on the decision depends if a cut has already been fully factored in, but I don't think it has yet."

The pound still has some way to go before it beats the highs seen in 1980 and 1981, when sterling reached more than 2.40 US dollars.

On November 5, 1980, the pound hit 2.446 against the dollar, before which the highest levels were seen only in the early 1970s, when it reached 2.644.

But Mr Hughes said it was possible the pound could break through that barrier given the current interest rate climate in the US and UK, alongside fears over the US economy.

The US Federal Reserve is widely expected to trim rates by 0.25% on Wednesday, just a month after cutting rates by a higher-than-expected 50 basis points. Data on the country's slowing housing market has added to the view that a cut is on the cards.

Meanwhile, in the UK, previous expectations for a rate decrease from the Bank of England as early as November have been scaled back after inflation and economic growth figures have provided little cause yet for a move down.