Dollar hits 11-year low

The US dollar hit an 11-year low against the pound today as dealers fretted over the direction of monetary policy in the world’s biggest economy.

The dollar slipped beyond the 1.87 mark against sterling as the implications of a statement by the Group of Seven finance ministers was felt across currency markets.

Concerns that the G7 gathering in Florida at the weekend would light a path for a revival in the fortunes of the dollar were not realised with finance chiefs focusing on exchange rates in Asia instead.

Jane Foley, of Barclays Capital, said: “The G7 meeting removed the fear in the market that the group was going to start chasing the dollar back up again. Instead it cleared the air and allowed us to revisit the fundamentals.”

These fundamentals include the size of America’s current account deficit and the growing gap in interest rates set by central banks on either side of the Atlantic, she said.

The decision by the Bank of England to raise UK interest rates to 4% last week had made sterling more attractive to dealers and the 1.90 level could be tested in coming weeks, she added.

Markets will pay close attention to comments on the economy and monetary policy by US Federal Reserve chairman Alan Greenspan, who is due to testify before Congress tomorrow.

Ms Foley said: “He will try to be encouraging on the economic front but at the same time won’t be leading us to a the false impression that rates can go up soon as the economic data at the moment doesn’t support it.”

The dollar also closed in on a new low against the euro today as it broke through the 1.27 mark.

Strategists predict it could go beyond 1.30 over the next few months – a move that would add to the factors dragging sterling higher.