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LONDON: The dollar sank to a 26-year trough against the British pound on Tuesday and held near a two-month low against the euro amid prospects of higher European interest rates, dealers said.
They said the pound was surging against the dollar as dealers look to a likely interest rate hike in Britain this week.
The dollar was pressured by doubts that the Federal Reserve would hike US interest rates again in the near future, amid jitters about international security after a series of failed car bombings in Britain.
The pound rose to 2.0197 dollars in early European trade -- the highest level since 1981. It later stood at 2.0166 dollars.
The euro traded at 1.3610 dollars, compared with 1.3623 dollars late on Monday in New York. The single currency had hit 1.3638 dollars on Monday, which was the highest level since May 1. Its all-time high against the dollar, 1.3682, was reached on April 27.
The dollar firmed to 122.50 yen, from 122.39 yen late Monday.
"The main story here is a rallying sterling, with the pound boosted by the prospect of a BoE rate hike later this week -- and obviously unfazed by the terror alert," said CIBC economist Audrey Childe-Freeman.
The Bank of England was expected to increase its key interest rate by a quarter-point to 5.75 percent on Thursday.
The European Central Bank will meet the same day and is expected to leave its benchmark rate on hold at 4.0 percent. But the market will be looking for signals on a possible August rise, dealers said.
The dollar was on a weak footing "as investors look for interest rate hikes pretty much everywhere but the US," noted NAB Capital strategist John Kyriakopoulos.
The greenback was still coming under pressure from last week's Fed meeting at which the US central bank opted to keep its short-term fed funds rate pegged at 5.25 percent, where it has been for a year.
The euro was also supported by firm data after an index of eurozone manufacturing activity rose in June to 55.6 points from 55.0 in May, beating forecasts.
Analysts warned that Tuesday's US data could increase pressure on the dollar, particularly if pending home sales disappoint to the downside amid the shaky backdrop of the troubled subprime housing sector.
The United States will celebrate Independence Day on Wednesday when US financial markets will be closed.
The euro was changing hands at 1.3610 dollars, against 1.3623 dollars late on Monday, 166.68 yen (166.76), 0.6750 pounds (0.6751) and 1.6544 Swiss francs (1.6492).
The dollar stood at 122.50 yen (122.39) and 1.2158 Swiss francs (1.2106).
The pound was being traded at 2.0166 dollars (2.0173).
On the London Bullion Market, the price of gold firmed to 657.30 dollars per ounce, from 654.75 dollars late on Monday.
- AFP/so
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