Sterling extends falls versus dollar on downbeat Bank of England report

LONDON Thu Feb 14, 2013 9:10am GMT

A generic picture of a some British sterling money in coins and bank notes. BANKG REUTERS/Catherine Benson CRB

A generic picture of a some British sterling money in coins and bank notes. BANKG

Credit: Reuters/Catherine Benson CRB

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LONDON (Reuters) - Sterling fell to a six-month low against the dollar on Thursday, extending falls after the Bank of England suggested it was willing to tolerate higher inflation and may opt for more stimulus.

The BoE's quarterly inflation report on Wednesday gave a downbeat growth outlook and said inflation would remain above its 2 percent target until early 2016.

The pound fell 0.3 percent to hit $1.5493, its lowest since early August, breaking below a reported options barrier at $1.5500. Traders reported another barrier at $1.5485.

Analysts said the prospect of price pressures staying high and impacting growth would weigh on sterling. More falls could see it target the late July low of $1.5458 and then the mid-July trough of $1.5393.

"Sterling's weakness reflected what (BoE Governor Mervyn) King said, that the BoE would do more if necessary and was prepared to look through high inflation," said Nawaz Ali, analyst at Western Union.

But with King forecasting a "sustained recovery", albeit a slow one, and the possibility of data on Thursday showing a pick-up in retail sales, he said further falls in the coming days could be limited.

"The fact that King said there were signs of a recovery means sterling could see a bit of consolidation around the $1.55 area." A sustained break below $1.55, however, would target $1.53.

Against the euro, the pound edged higher after data showed gross domestic product in Germany and France contracted more than expected in the fourth quarter.

The euro was down 0.2 percent at 86.37 pence, remaining not far away from a 15-month peak of 87.17 pence struck earlier this month.

Sterling's trade-weighted index was at 79.8, also just a shade above Wednesday's 15-month low of 79.7.

A WEAKER POUND?

Analysts also pointed to comments by King that seemed to suggest that the Bank would be happy to see a weaker pound.

He spoke of a need to "find ways of boosting overseas demand for our products in order to bring about the rebalancing that the UK economy needs to see."

King also said a G7 statement issued on Tuesday meant countries should be allowed to use monetary stimulus to support growth. Where easing impacted exchange rates, he said that should be allowed to happen.

"While the BoE has adjusted its language regarding sterling, moderating the calls for a decline to support the rebalancing of the economy, one of the reasons cited for the forecast of above-target inflation is weak sterling," analysts at Morgan Stanley said in a note to clients.

"We maintain our view that sterling/dollar is likely to extend the decline towards the $1.54 area initially and then the $1.5235 lows of early last year."

(Editing by John Stonestreet)

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