The US dollar and sterling have continued to decline, boosting the pound further on the foreign exchange markets.

Growing expectations that the US could be moving closer to cutting interest rates dealt a fresh blow to an already weak dollar. Currency markets seized on remarks at the weekend by US Federal Reserve chairman Mr Alan Greenspan that the US central bank no longer viewed inflation as the main threat to the US economy.

As a result, the pound closed at 87.38p against sterling from 86.47p on Friday as the UK currency fell to three-month lows against the mark, tracking the dollar lower. But the US labour day holiday meant trade was very thin.

Sterling has now lost a lot of its safe haven status and further declines are likely, according to Mr Pat O'Sullivan, economist at AIB. The pound is now likely to move as high as 90p against sterling over the next few weeks and to $1.47, he added.

According to Mr David Brown, chief economist at Bear Stearns in London, the dollar is dragging sterling down because of the weak Dow and on the other hand sterling is being dragged down by perceptions about domestic prospects.

Analysts now believe that a cut in UK interest rates is becoming more possible as a result of falling exports from the manufacturing sector and general weakening in the economy and even in the services sector.

The Bank of England's monetary policy committee is due to meet on Wednesday, but few expect a cut this soon.

Mr O'Sullivan added that Mr Greenspan was merely trying to calm the equity markets and a US interest rate cut this month is unlikely as the Fed waits to see what will transpire in Russia.

The market was also closely watching the Russian Duma vote on prime minister designate Mr Viktor Chernomyrdin, where he was defeated again. The long-awaited submission of his resignation by the chairman of the Central bank, Mr Sergel Dubinin, was also being factored in.

A lot now depends on Russia, according to Mr O`Sullivan." In the short term it is probably good but will hinge on whether Russia defaults on longer term debt repayment."

If Mr Chernomyrdin does get elected at the third attempt there will have been a significant number of compromises with the Communist Party, he noted.