Sterling eased against the dollar on Monday, pausing for breath as the US currency tried to claw back a little of last week's hefty losses which saw the pound hit 14-year highs.
Sterling steamed ahead last Friday to a peak of $1.9847 as the dollar succumbed to heavy selling across the board after data showed the first contraction in US manufacturing for 3-1/2 years. The figures raised talk of a Federal Reserve interest rate cut early next year.
The euro hit 20-month highs against the embattled dollar in Asian trading on Monday ahead of the European Central Bank's widely expected decision later this week to raise interest rates a quarter percentage point to 3.5 percent.
In European trading on Monday the dollar stabilised in profit-taking sparked by the euro's further rise. But analysts said the pound was still eyeing the psychological $2 level even though the Bank of England is expected to keep UK rates steady this week."Euro/dollar and cable (sterling/dollar) have gone up very quickly and so some sort of pause was necessary," RBS currency strategist Paul Robson said. "This very mild retracement could continue maybe into tomorrow but we think that unless the market starts to really re-think the idea that the Fed will start cutting rates next year, then the dollar is going to remain under pressure."
By 1502 GMT the pound stood at $1.9761, down 0.1 percent on the day104.50. The pound has been one of the best performers against the dollar this year, fuelled by inflation-fighting Bank of England rate increases, inflows for mergers and acquisitions and central bank reserve purchases. Last week's move took it to levels not seen since just before Britain was forced to abandon Europe's pre-euro Exchange Rate Mechanism in September 1992.