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Sterling tumbles on UK economy concerns

Tokyo, September 1, 2008

Sterling fell versus the dollar to its lowest level in more than two years and slid to a record low against the euro on Monday, after Britain's finance minister said the country's economic downturn might be the worst in 60 years.

The dollar approached an eight-month high against a trade-weighted basket of currencies. The yen jumped to a five-month high vs sterling and a four-month peak against the euro, and also rose against the Australian and New Zealand dollars.

Sterling fell to as low as $1.8005 its lowest level since April 2006. It later trimmed some losses to stand at $1.8047 for a decline of 0.9 percent on the day.

Gerrard Katz, head of North Asia FX trading at Standard Chartered in Hong Kong, said the market's volatility was due to stop-loss selling in a variety of sterling pairs, along with euro/yen and some others.

"Certainly no one's rushing to buy cable at the moment," Katz said. "There was a lot of weekend press about how bad the UK economy is at the moment, so that's weighing on the market."    

The pound fell more than one percent versus the dollar at one point following the comments by Chancellor of the Exchequer Alistair Darling, which were printed in the Guardian newspaper on Saturday.

Darling said in an interview that Britain's economic downturn is likely to be deeper and last longer than originally feared.

The pound slid to 81.39 pence to the euro on the Reuters dealing system, the lowest for sterling since the single European currency was launched in 1999.

Sterling also hit a five-month low of 195.15 yen.

"Even with a US holiday it could be an interesting day," said a trader for a European bank. US markets will be closed on Monday for the Labor Day holiday.

Sterling extended its losses after falling more than 8 percent against the dollar in August in its biggest drop since it crashed out of the Exchange Rate Mechanism in 1992.

While the Bank of England is seen likely keeping interest rates on hold at 5.0 percent at a two-day policy meeting that ends on Thursday, sterling has been hurt by speculation that the central bank may lower interest rates later this year.

"It is hard to buy the pound and the dollar is favoured comparatively as a result," said a trader for a European bank. The dollar index rose 0.4 percent to 77.504 A rise above 77.619 would take the index, which measures the dollar's value against a basket of currencies, to an eight-month high.

The dollar has rallied broadly over the past month, benefiting from signs that the U.S. economy's weakness was spreading to other major economies.

The euro fell 0.2 percent to $1.4640 A fall in the euro to below $1.4570 would take the single European currency to its lowest level since mid-February.

Against the yen, the euro fell as low as 158.42 yen on trading platform EBS to its lowest in more than four months, partly due to Japanese exporter selling, said a trader for a Japanese bank.

The yen gained against Australian dollar and New Zealand, helping to drag the dollar lower against the Japanese currency despite the greenback's broad rise. The dollar dipped 0.3 percent to 108.46 yen.

"As the global slowdown spreads and weighs on equities markets, risk aversion will likely support the yen," said Hideki Hayashi, chief economist at Shinko Securities. - Reuters




Tags: Currency | euro | Dollar | Sterling |

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