* Sterling hits 8-mth high vs euro as Italy debt worries
* TWI GBP also hits 8-mth high, but pound falls sharply vs
* Concerns about euro zone crisis impacting UK may pressure
By Jessica Mortimer
LONDON, Nov 9 Sterling rose to an eight-month
high against a broadly weak euro on Wednesday after benchmark
Italian bond yields rose to levels widely deemed unsustainable,
taking the euro debt crisis to new levels.
However, the pound fell against the dollar, dragged down as
investors sought the safety of the U.S. currency and by worries
that the crisis in Britain's euro zone trading partners could
push the UK economy back into recession.
The euro fell roughly 1 percent on the day to
85.09 pence, its lowest since early March, after the 10-year
Italian government bond yield jumped above 7 percent.
Traders said demand to sell euros for sterling from a UK
firm related to dividend payments also pushed the shared
Market participants said the pound could gain further versus
the euro if Italian bond yields keep rising. Sterling's
trade-weighted index rose to an eight-month high of 80.9 .
"The sovereign debt crisis in the euro zone is really
driving everything, with everyone keeping an eye on Italian
bonds," said Andre de Klerk, head of options and advisory at
"The UK isn't part of the euro and it has a bit of fiscal
and monetary manoeuvrability but the euro zone is our biggest
trading partner and this crisis will affect the UK
Some analysts said any sign of weakness among UK financial
institutions due to their exposure to debt issued by weak euro
zone nations would knock the pound, as it would highlight the
UK's vulnerability to the debt crisis.
But for now, they said the single currency was bound for
more weakness against the pound.
"A close in euro/dollar below $1.36 will add to downward
momentum in euro/sterling," said Sebastien Galy, currency
strategist at Societe Generale.
On Wednesday, the euro hit a one-month low of $1.3552
, breaking below its $1.36-1.38 range seen so far this
Galy added that he saw the possibility of a fall towards
83.00 pence, which would be around the lowest of the year.
Sterling fell more than 1 percent on the day to
$1.5911, before pulling back to $1.5947 in late London trade.
"Sterling is just caught in the crossfire of what's going on
in the euro zone," said Adam Cole, currency strategist at RBC,
adding this will mean it weakens against the dollar even as it
gains versus the euro.
Also weighing on sentiment towards the pound, data on
Wednesday showed Britain's trade deficit deteriorated much more
than expected in September to 9.814 billion pounds, its widest
since the series began in 1998.
The Confederation of British Industry said the risk of
another recession had risen as it cut its forecasts for UK
economic growth, although it believed Britain could avoid this.
Consistent weakness in the UK economy prompted the Bank of
England to adopt further quantitative easing last month, which
is often considered currency negative as it involves flooding
the market with pounds. Despite this, sterling has held up
against a broadly weak euro.
(Additional reporting by Naomi Tajitsu; Editing by Ruth