Sterling slides as weak economy continues to drag

The sterling slid yesterday, approaching a two-year low against the dollar as poor sentiment on the domestic economy combined with fears about slowing global growth to drag down the high yielding currency.

The sterling has fallen over 15 cents from a peak over $2 against the dollar since last month, hurt by a cocktail of slowing growth and spiralling inflation.

A run of poor data from the housing, retail and service sectors and the Bank of England's assertion that inflation will fall below target in two years have raised expectations that interest rates may be cut from five per cent before the year is out.

"The data continue to be quite poor and retail data out this week are also likely to be pretty sluggish, which is making people more confident that there will be a rate cut before Christmas," said Paul Robson, currency strategist at Royal Bank of Scotland. Retail sales data on Thursday are seen falling 0.3 per cent on the month in July.

Bank of England monetary policy committee member Tim Besley highlighted the central bank's policy dilemma yesterday.

In an article in The Sun newspaper he said the Bank faced a difficult task in fine-tuning monetary policy to try to help the economy while also keeping inflation in check.

Worries about the state of the financial sector and the global economy have stung sterling in past months, leading investors to exit relatively risky carry trades where they borrow low-yielding currencies to fund purchases of assets in higher-yielding ones.

Such trades had pushed sterling to its strongest level in roughly 16 years against the low-yielding yen last year.