Pound drops further against stronger dollar

The pound continued to fall today as the dollar surged further over fears of weakening economic growth in the eurozone.

Sterling was trading at $1.8572 just before noon, down from $1.8752 when the market closed yesterday. The weakness of the pound reflects the strength of the dollar, which is rising on concerns that the sharp economic slowdown in the US is now spreading to other countries.

Official figures yesterday showed that the European economy contracted for the first time since the launch of the euro in 1999, down by 0.2pc in the second quarter. The Japanese economy also shrank in the second quarter by 0.6pc.

The Bank of England's Governor, Mervyn King, warned on Wednesday that it was now almost inevitable that the UK would face "a quarter or two of negative growth", making the prospect of a recession very likely.

Gold fell below $800 an ounce in the Far East for the first time in eight months as part of a wider commodities sell-off in response to a stronger dollar. It continued to fall alongside oil, copper and precious metal when the market opened in London this morning.

Fears that the global slowdown is spreading has reduced the appeal of alternative investments.

Paul Robson, currency strategist at RBS, said: "I would suggest that commodity prices are coming off because the dollar is going up but equally people have really got on board now with the fact that the world is not decoupling.

"It is clear that Europe and Asia are really starting to slow now and it's not just the US."

Gold hit $788.50 an ounce at one stage during trade in the Far East, down from $811 in late trading in New York. It stayed below $800 when markets opened in London. Silver fell to its lowest level since last September. Platinum and palladium also fell.

In March gold was trading at a record highs above $1,000 but has lost its gains as the liquidity crisis feeds through to the global economy.

With oil coming off its recent highs above $147 a barrel - it opened down $1.86 at $111.82 in London, gold's role as a hedge against inflation has diminished.

Some investors are betting that with figures out yesterday showing inflation rising in the US, the Federal Reserve will have little scope to raise rates.

"I am not surprised to see a breakthrough of $800 now, and I guess what's coming into play now is more technical selling below $800," Darren Heathcote of Investec Australia in Sydney told Reuters.

Source: Telegraph.co.uk