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Thursday November 30, 2006 - 11:09:24 GMT
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Sterling hits 14-yr high vs ailing dlr, $2 beckons

Sterling hits 14-yr high vs ailing dlr, $2 beckons
Thu Nov 30, 2006 5:59am ET15

(Changes dateline, adds quotes, updates prices)

By Veronica Brown

LONDON, Nov 30 (Reuters) - Sterling shot up to a 14-year peak against a broadly weakening dollar on Thursday, its highest since Britain was forced to abandon Europe's precursor to the euro, prompting traders to eye the psychological $2 mark.

The pound has been one of the best performers against the fragile dollar this year, with gains fuelled by inflation-busting Bank of England rate hikes, inflows from mergers and acquisitions and central bank reserve purchases.

It was last this strong against the greenback in September 1992, a time etched firmly in the currency's history, when the UK was forced to abandon the European Exchange Rate Mechanism, the forerunner to the euro.

Data from the Nationwide Building Society on Thursday showing a 1.4 percent jump in British house prices this month proved to be the final catalyst to take the pound back up to those peaks.

"The break to the upside was very much expected -- today's data has certainly supported sterling, along with continued foreign direct investment inflow, plus we are talking generally about U.S. dollar weakness," said Hans-Guenter Redeker, chief currency strategist at BNP Paribas.

Sterling hit a 14-year peak of $1.9580 before retreating to $1.9556, up half a percent on the day by 1030 GMT.

It hit a 2-1/2 year high on the Bank of England's trade-weighted index at 104 <=GBP> and an eight-year high against the yen at 227.49 .

t was broadly steady against the euro at 67.46 pence .

Bank of England governor Mervyn King kept alive the prospect of UK interest rates moving above the current 5.00 percent on Thursday, saying inflation had picked up and been above the bank's 2 percent target.

After trying and failing twice in the early 1990s to move beyond $2, some analysts say sterling could make the move in a slightly more sustainable way.

Back in 1992 sterling tumbled 25 percent in just three months after investors successfully speculated against the pound.

Traders and analysts said sterling's further upside progress would depend on the euro making fresh peaks against a broadly weaker dollar.

The dollar's interest rate advantage over the euro should narrow next week if the European Central Bank tightens monetary policy further, as is widely expected.

"I certainly have pencilled that ($2) in, by the end of the year we're going to have an attempt. If you look at the way sterling does move when you are trending, it can cover quite a lot of ground," said Simon Derrick, head of currency research at Bank of New York.

Others were more sceptical.

"If euro/dollar can break through the record highs without too much political objection, then I think you might see $2 in cable (sterling/dollar), but my suspicion is we won't get through $1.3660 on euro/dollar and that will probably prevent cable going through $2 as well," said Steven Pearson, chief currency strategist at HBOS.

For the year, sterling is now up nearly 14 percent against the dollar, poised for its best yearly performance since 1990.

(Additional reporting by Sylvia Westall in London)

© Reuters 2006. All Rights Reserved.

 

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