Sterling down on euro zone woes as dollar shines

Mon Jul 23, 2012 4:25pm BST

Related Topics

* Pounds falls 0.8 percent vs broadly higher dollar

* Short selling ban fuels demand for safe havens

* Concerns over Spain, Greece fuel save haven demand

By Michael Szabo

LONDON, July 23 (Reuters) - Sterling touched a week-low against the dollar on Monday, pulled down by weakness in euro/dollar as worries over Spain and Greece's debt problems drove investors to seek sanctuary in the greenback and avoid perceived riskier currencies.

The pound dropped further after Spain and Italy announced bans on short selling of financial stocks, aimed at discouraging speculative trading that could weigh on the countries' banks and insurers.

The ban "has contributed to a further flow of capital to both the dollar and the yen," said Michael Derks, chief strategist at FxPro, who said the move added to concerns that the situation in the euro zone was deteriorating.

Sterling lost 0.8 percent to hit a session low of $1.5486 against the dollar, the lowest level in a week.

Spain's borrowing costs jumped to euro-era highs on Monday on media reports that six more of the country's regions could follow in Valencia's footsteps and seek central government aid.

Greek Prime Minister Antonis Samaras said the country was in a 1930s-style "Great Depression", while investors were also worried about Greece's future in the euro zone following a report in German magazine "Der Spiegel" that the IMF may not take part in any more financing for the country.

Those concerns eased slightly after the IMF said it would start discussions with Greek authorities on July 24 on how to get Greece's economic programme back on track.

The euro recovered from a near 3-1/2 year low of 77.62 pence hit during Asian trade, to last trade up 0.3 percent against sterling at 78.06 pence.

UK DATA WEAKNESS

The pound has benefited in recent months from being seen as a safe-haven alternative to the euro despite the UK's own heavy debt burden and strong financial ties to the euro zone.

But as yields on 10- and 30-year U.S. Treasuries hit record lows, analysts said investors still preferred the traditional safe havens of the dollar and Japanese yen, which both rose against the pound.

Sterling dropped by more than 1 percent against a buoyant yen to a seven-week low of 121.16 yen.

Some strategists said sterling could see further weakness if preliminary second quarter UK GDP figures on Wednesday show a 0.2 percent quarter-on-quarter slide as expected, which would extend the country's recession into a third quarter.

"We've seen some closing of short positions in euro/sterling ahead of the figures but we may well see cable (dollar/sterling) fall further as traders are potentially positioning for a worse than expected number," said FxPro's Derks.

Even if GDP data does show the UK is still in recession, some analysts said the impact on sterling may be limited.

In a note to clients, Commerzbank said investors are selling the euro on every piece of negative euro zone news yet willfully ignoring poor UK data, and highlighted worse-than-expected retail sales for June and above-forecast public sector borrowing figures released last week.

"The negative UK economic data is less of an issue right now as people are focused on the euro zone," said Geoffrey Yu, FX strategist at UBS. (Reporting by Michael Szabo; Editing by Hugh Lawson)

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