Sterling loses more ground against the dollar

LONDON - August 15, 2008 Sterling hit $1.85 - the cheapest in almost two years.

As recently as July, one pound would buy two dollars.

The pound started falling dramatically on Wednesday, when Bank of England governor Mervyn King predicted that the British economy would stagnate for the next year, and opened the door to the idea that he might cut interest rates in 2009.

If interest rates fall, sterling deposits will become less profitable, so the suggestion led to an investor flight from the currency. Measured against a basket of trade-weighted currencies, the pound is now at its weakest level since 1996.

"The U.S. was the first economy to hit trouble" in the current global economic crisis, said Tim Clayton, chief strategist at currency advisory consultancy Investica.

"Now people are realizing that the U.K. has the same problems as, if not more so than, the U.S."

The pound's fall also reflects a fundamentally strengthening dollar, which is benefiting from falling commodities prices and the U.S.'s still-growing economy, even as the 15-nation eurozone's GDP begins to fall.

Oil dropped to $113 a barrel on Friday - down from an all-time high of $147 a month ago - on speculation that the global economic slowdown will diminish demand, and that the Russia-Georgia conflict won't interrupt deliveries through pipelines in Georgia.

Metals, vegetable oil, corn, wheat and rubber are suffering from similar falls.

Gold and silver are trading at multi-month lows, with the spot price of gold falling as low as $789 an ounce - it's lowest since December.

As a result, investors who shunned the dollar in favor of commodities are now moving back again.

"There's a fear that the whole commodity boom is going to end, that the bubble is going to burst," said James Hughes, market analyst at financial traders CMC Markets.

"That's giving the dollar a bit of cheer."

British holiday-makers who've been enjoying record high exchange rates abroad will be unhappy with the new relatively weak pound.

But many British businesses, including exporters and the tourism industry, will benefit from it as it makes their products and services more affordable to potential customers around the world.

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