Dollar hits 26-year low vs pound

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar dropped to a 26-year low against sterling and traded near a record low versus the euro on Wednesday, as expectations for U.S. interest rate cuts contrasted with prospects for monetary tightening in Europe and Asia.

The greenback later turned slightly higher against the pound, trimmed early losses against the euro and fell against the yen.

"There's been a slight dollar (selling) pullback. I think some major levels have been touched upon, so we're seeing some profit-taking on short dollar positions," said C.J. Gavsie, managing director for FX sales at BMO Capital Markets in Toronto.

"But interest rate expectations remain the fundamental driver in this market", which should weigh on the dollar, Gavsie said. BMO is looking for a slight increase in Japanese rates, hikes from the European Central Bank and Bank of England, and mostly steady to lower rates in the United States in coming months.

For the rest of the week, analysts expect dollar weakness to remain the dominant theme since there are no Federal Reserve officials scheduled to speak and no major market-moving U.S. economic data due for release.

The pound, which rose above $2 on Tuesday for the first time since 1992, on Wednesday scaled levels last seen in June 1981. In that year, the pound had fallen sharply from a high above $2.40 hit in January 1981.

Sterling rose as high as $2.0133 GBP on expectations the BoE will raise interest rates by at least 25 basis points to 5.5 percent in May, which would top the U.S. federal funds rate. It last traded at $2.0046, down 0.2 percent on the day.

The euro also slowly approached historic highs versus the dollar, rising above $1.3600 for the first time in two years and coming within 60 ticks of record peaks set in December 2004.