Dollar slumps to fresh 26-year low against sterling

TOKYO (AFP) - The dollar sank to a fresh 26-year low against the British pound in Asian trade Wednesday on prospects of higher European interest rates and concerns about the US property market, dealers said.

The pound hit a new peak of 2.0492 dollars, the highest since 1981 on growing expectations of another rise in British interest rates to quell inflation, a move likely to make sterling more attractive to investors.

The dollar was under pressure across the board after US economic news failed to assuage concerns about the health of the US economy and the sub-prime mortgage sector catering to people with patchy credit histories, dealers said.

The dollar slipped to 121.91 yen in Tokyo morning trade from 122.27 in New York late Tuesday.

The euro firmed to 1.3819 dollars from 1.3781 but eased to 168.47 yen from 168.54.

"Strong concern over the troubles in the US sub-prime mortgage market are weighing on the dollar," said Masaki Fukui, a senior market economist at Mizuho Corporate Bank.

"Against that background, and with prospects of higher interest rates in Europe, the European currencies are performing strongly," he added.

Core British inflation which excludes energy, food, alcoholic beverages and tobacco increased to an annual rate of 2.0 percent in June, up from 1.9 percent the previous month and the highest reading since March 1997.

The figures fanned market expectations of another quarter-point interest rate hike by the Bank of England to 6.0 percent, dealers said.

The euro also gained on the dollar despite a fall in the ZEW economic research institute's survey of German investor confidence.

"It seems like the (German) economy is losing momentum but traders are more focused on the weakness of the dollar," said Fukui.

The latest economic reports provided little respite for the dollar.

US producer prices fell 0.2 percent in June, defying expectations for a rise of 0.2 percent. The National Association of Home Builders' index fell to 24 points in July the lowest level since January 1991from 28 in June.

The markets were also jittery ahead of Federal Reserve chairman Ben Bernanke's testimony to Congress on the state of the US economy later Wednesday, as well as US consumer price inflation numbers.

Bernanke comments "could help the US dollar, as he will likely reiterate that inflation is the primary concern, rather than a much weaker economy, and also play down the potential for the sub-prime mortgage meltdown to put a large dent in the economy," predicted analysts at NAB Capital.

The Fed has kept its key short-term interest rate pegged at 5.25 percent for over a year as it focuses on warding off inflationary pressures despite a persistent housing slump.