Sterling at 12-year high to US dollar

STERLING posted its eighth weekly gain against the US dollar to reach a 12-year high, on signs of stronger economic growth in Europe's second-largest economy.

Bank of England governor Mervyn King says he expects growth to accelerate in the fourth quarter of 2004.

House prices gained 1%, recovering from their first drop in three years in October, the Nationwide Building Society.

The British currency reached $1.94 last week having gained 9% in the past three months.

"The less dovish comments by Mervyn King and the data being better than expected did bring into question those who were thinking about monetary policy easing and fuelled the movement in sterling versus the dollar," said Derek Halpenny, a currency strategist at Bank of Tokyo-Mitsubishi in London.

Sterling currency pulled out of Europe's pegged Exchange Rate Mechanism in 1992, when George Soros made $1 billion betting the government would fail to keep the peg.

Chancellor of the Exchequer Gordon Brown expects the economy will grow as much as 3.5% next year, in line with his March forecast.

Gross domestic product will expand 3.25% this year, in line with his March forecast of 3-3.5%, Mr Brown said in his pre-budget report to parliament in London.

Interest-rate futures show investors and traders have increased bets the Bank of England will raise its key interest rate.

The rate on the contract expiring December 2005 has gained 15 basis points since the beginning of the week to 4.83%.

The contract settles to the three-month London interbank offered rate, or Libor, which since 1987 has averaged about 0.14% point above the central bank's key interest rate.

The bank has raised the main interest rate five times in the past year, to 4.75%, to help curb inflation and cool rising house prices.

The Organisation for Economic Cooperation and Development said in its semi-annual Economic Outlook that the Bank of England should raise its key rate to 5.5% next year to head off inflation.

The OECD forecasts Britain's economy to grow 3.2% this year and 2.6% in 2005.

The Confederation of British Industry said its retail sales index showed the most retailers reporting gains in four months.