Sterling hits 5-week high versus dollar, falls versus euro
LONDON (Reuters) - The pound rose to a five-week high against the dollar on Friday but fell against the euro on speculation the European Central Bank and euro zone governments would step up action to stem the region's debt crisis.
France's Le Monde newspaper reported that the ECB and governments were preparing to intervene to bring down Spanish and Italian borrowing costs, while German Chancellor Angela Merkel and French President Francois Hollande pledged to do all they could to protect the euro.
The pound has stayed relatively resilient despite data earlier this week showing the UK economy slumped far more than expected during the second quarter.
It was up 0.3 percent at $1.5730 against the dollar, having risen as high as $1.5768, buoyed with the euro and other riskier currencies.
A broadly firmer euro rose 0.4 percent to a nine-day high of 78.64 pence as the latest comments backed up remarks made by ECB President Mario Dragi the previous day and prompted investors to cut short positions in the currency.
"We had terrible GDP number but sterling didn't react that much and has reacted far more to the comments from Draghi," said Christian Lawrence, currency strategist at Rabobank.
Analysts said with the market's focus firmly on events in the euro zone, sterling was likely to continue to track movements in the euro against the dollar.
"On the broader scheme of things euro/sterling has held in a relatively tight range against the euro," said Jennifer Hau, currency strategist at Lloyds.
The pound stayed not far from a near four-year high of 77.56 pence per euro hit earlier this week.
Next week, focus will switch to whether policymakers in Europe and the United States opt for further easing measures. Data showing U.S. economic growth slowed as expected in the second quarter may increase the risk of more easing.
These decisions are expected to overshadow Thursday's policy decision by the Bank of England, which is forecast to leave its quantitative easing target and interest rates unchanged.
Analysts said sterling may be vulnerable to more weakness in the coming days and weeks as investors price in the prospect of further QE or even a 25 basis points rate cut.
Concerns about the prospect of a UK credit rating downgrade may also weigh on the currency.
A poll conducted by Reuters on Thursday found that Britain had about a one in three chance of losing its triple-A rating as a weak economy hampers government efforts to cut the deficit through a harsh campaign of budget austerity.
(Editing by Catherine Evans)
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