The pound continued its fightback against the euro yesterday, pushing the single currency down towards the 90p-mark and ever further away from the 98.03p record high hit on Tuesday last week.

Yesterday's continuing slide in the euro made parity with the pound appear a much more distant prospect. Early last week, currency markets had looked intent on driving the euro through this landmark.

The single currency was last night trading around 90.5p, down nearly another 3p on its close in London on Monday, having been pegged back as far as 90.24p during the session. The euro traded below 67p as recently as July 2007.

The euro was weak across the board again yesterday, as foreign exchange traders continued to question the extent of the single currency's rise given the economic backdrop in the 16-nation eurozone.

An unexpectedly large drop in eurozone inflation to a 26-month low of 1.6% in December, from 2.1% in November, fuelled expectations of a substantial cut in interest rates in the single currency bloc next week. The European Central Bank has been much slower to cut its benchmark rate than the Bank of England has been in reducing UK base rates.

The ECB has reduced benchmark eurozone rates from 4.25% in October to 2.5%. Yesterday's news of a fall in inflation to below the ECB's 2% target raised the prospect of the central bank cutting by as much as three-quarters of a point next week.

Sterling also managed a major advance against the dollar. The pound was last night trading around $1.4940 - up more than three cents on its close against the US currency in London on Monday.

Sterling achieved its gains yesterday in spite of a strengthening belief that the Bank of England's Monetary Policy Committee will deliver a further big cut in UK base rates tomorrow. The MPC has already slashed base rates from 5% in early October to 2%. Any further reduction would take them to their lowest level since the Bank of England was created in 1694.

Minutes of the US Federal Reserve's December 15 and 16 meeting, published last night, showed that some members of its rate-setting Federal Open Market Committee were worried about inflation falling too far and staying too low for too long as they cut benchmark interest rates in the world's largest economy from 1% to between zero and 0.25%.

The minutes state: "Some members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels."

Fed policymakers also wanted to make clear they intended to keep interest rates very low for an extended period.

The minutes state: "Participants judged that communicating the committee's expectation that short-term interest rates were likely to stay exceptionally low for some time could be useful."

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