Sterling at 2-month low in market rush to dollars
LONDON (Reuters) - Sterling hit a two-month low against the dollar on Wednesday as concerns about a messy Greek exit from the euro zone prompted investors to sell what they see as riskier currencies, and poor retail sales data added to a shaky UK growth outlook.
Minutes from the BoE's May policy committee meeting showing members voted 8-1 to keep asset purchases unchanged provided some support for the pound, given some market players had been positioned for a closer vote.
But for several members the decision not to expand the 325 billion pounds programme was 'finely balanced' and analysts said the minutes left the door firmly open for more quantitative easing later in the year.
Sterling, also called cable, was last down 0.4 percent at $1.5706, paring losses after hitting a session low of $1.5677, the lowest level since mid-March.
It fell heavily ahead of the BoE minutes and retail sales data, tracking a sharp move in the euro which hit a 21-month trough against the dollar as investors retreated to dollars.
"We had quite a big move in cable as the recent low broke in euro/dollar. It wasn't unique to sterling," said Adam Cole, global head of FX strategy at RBC Capital Markets.
"Clearly the momentum for further QE is building but we kind of knew that already. The fact there was only one vote for QE was less than the market priced in and this may be why we're seeing a bit of a bounce."
UK retail sales slid 2.3 percent, their fastest monthly decline in more than two years in April. Although the drop was worse than forecast, analyst said the figures were distorted by poor weather and panic buying of fuel in March.
Still, the weak start to the second quarter highlighted the fragility of the UK economy, which is in recession, and may add to bets the BoE will opt for another cash injection.
Quantitative easing, which is potentially inflationary, involves printing cash to buy bonds and boost growth and tends to weaken the value of a currency by increasing its supply.
GREEK EXIT JITTERS
The euro dipped 0.1 percent against the pound to 80.39 pence, hurt by worries that a Greek election next month could propel the country out of the currency bloc. Such fears also feed speculation that markets could force other weak economies down the same path.
Against sterling, the euro hit a two-week high of 81.02 pence on Tuesday before being knocked lower after a news wire quoted former Greek Prime Minister Lucas Papademos as saying preparations for a Greek exit were being considered.
European Union leaders meet later on Wednesday, although market players were sceptical they could make much progress in tackling the debt crisis that also threatens to engulf the far bigger Spanish economy.
Some market players said worries about the euro zone meant the shared currency was likely to decline against the pound, bringing back into focus the 3-1/2 year low of 79.50 pence hit last week.
Events in Greece were also expected to have a significant impact on the BoE's decision on whether or not to opt for more QE. Policymakers will pump more money into the faltering UK economy if the euro crisis causes more mayhem, the minutes said.
"With the euro zone stuck in an awkward limbo until Greece's election on June 17, the Bank has clearly decided to watch and wait before unleashing further stimulus," said Glenn Uniacke, senior dealer at Moneycorp.
"Should the worst happen in the euro zone, any QE requirements will be changed beyond all recognition."
(Editing by Ruth Pitchford)
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