Sterling hits 5-week low versus dollar after U.S. jobs claims

LONDON Thu Jul 12, 2012 4:08pm BST

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LONDON (Reuters) - Sterling slipped to a five-week low against a broadly stronger dollar on Thursday after U.S. jobless claims fell to their lowest in four years and Federal Reserve minutes dampened expectations of further monetary easing in the near future.

The pound dropped 0.6 percent to as low as $1.5393 - a level not seen since June 6 - after the U.S. jobs data showed initial claims for state unemployment benefits fell more than economists had expected.

Sterling was down slightly against the euro at 79.04 pence, off a 3-1/2 year high of 78.71 pence touched on Wednesday, despite the euro extending losses against the dollar and Japanese yen.

"Sterling's playing the usual middle man role. It does seem as though euro/sterling is trying to find a bottom, but for the most part sterling is taking its cue from euro/dollar," said Daragh Maher, currency strategist at HSBC.

Investors sold perceived riskier currencies against the dollar after the release of June minutes from the Federal Reserve, which suggested growth in the world's largest economy would have to worsen for the central bank to launch more quantitative easing.

Asset buying from the Fed tends to weigh on the greenback against other currencies as it increases the supply of dollars in the system.

The euro also softened across the board as investors continued to fret about Europe's progress in addressing the region's debt crisis.

HAVEN STATUS

Sterling has benefited in recent months from being seen as a safe haven alternative to the euro zone's fiscal turmoil, although some market players said the gloomy outlook for the UK economy could limit the pound's gains.

"The prognosis for the UK is not a very good one, and only thing saving the pound so far is it's not the euro," said Alan Wilde, director of fixed income and currency at Baring Asset Management.

HSBC's Maher also said the UK risked losing its safe haven appeal, given the euro zone is the country's largest trading partner and a deteriorating sentiment on the continent would affect the domestic economy.

"The UK is not the most ugly of them all, but the danger is that to be a safe haven from another problem, you should be rather unaffected by it," he said.

"Under extreme scenarios, the UK economy and financial sector will be very badly affected (by the euro zone debt crisis), so that might be creating caution and maybe people aren't as confident that sterling is necessarily the haven from the storm."

The Japanese yen surged by over 1 percent against the pound, trading up to a one-month high of 122.07 yen after the Bank of Japan refrained from announcing more easing but tweaked its asset buying and lending programme.

(Reporting by Michael Szabo. Editing by Jeremy Gaunt.)

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