(Inserts dropped word 'year' in headline, lead paragraph)
* Euro broadly lower after Moody's cuts Italy credit rating
* Pound up 0.8 pct vs dollar but remains at risk
* UK inflation, retail sales data to come next week
By Michael Szabo
LONDON, July 13 Sterling rose to a 3-1/2-year
high against a broadly lower euro on Friday after Moody's
downgraded Italy and investors sold Europe's common currency in
favour of perceived safer alternatives.
The euro fell as low as 78.63 pence against the pound
, its weakest since November 2008. It was last at
78.74 pence, down 0.4 percent on the day.
"The price action suggests this isn't a sterling move but
rather a broader euro move," said Adam Myers, senior FX
strategist at Credit Agricole.
Market participants continue to shun the euro due to the
currency bloc's unresolved debt crisis and slowing global
Moody's cut Italy's credit rating by two notches to Baa2
late on Thursday and warned that further cuts could be on the
cards if Italy's access to debt markets dried up.
But the country passed a key market test hours after the
downgrade, selling the planned amount in bonds at an auction on
Friday that pushed the country's three-year borrowing costs well
below 5 percent.
RISES VS DOLLAR BUT VULNERABLE
Sterling rose against the dollar as firmer equity markets
encouraged investors to buy riskier currencies.
But analysts said sterling would be vulnerable against the
dollar if worries grow about the euro zone or the global growth
outlook, making investors more averse to taking on risk.
"If the euro falls, we think cable (sterling/dollar) goes
down with it," Myers said.
"Over the next six months euro/sterling is going to continue
to fall slowly in the absence of a euro zone break-up, but cable
is going to fall also, possibly down through $1.52."
Sterling was up 0.8 percent to $1.5541 against the dollar,
nearing a high of $1.5578 hit earlier this week.
"We recommend selling any sterling/dollar rebounds as we
believe that sterling will also remain vulnerable to the
deteriorating global risk environment," Morgan Stanley analysts
said in a note to clients.
Worries about the UK economy could also weigh on the
currency. UK data on Friday showed construction output dropped
6.3 percent year-on-year in May, adding to concerns Britain may
have contracted for a third consecutive quarter between
Renewed falls could see sterling retest a five-week low of
$1.5393 hit on Thursday.
The UK will publish inflation, jobs and retail sales data
"All this data would be quite important ... but it's going
to be secondary to the events taking place in the U.S. and
Germany," Myers said.
U.S. Federal Reserve Chairman Ben Bernanke will deliver a
semiannual monetary policy report next week that may shed light
on whether policymakers will opt for more quantitative easing.
In Germany, parliament will consider Spain's request for up
to 100 billion euros in loans from the euro zone's bailout funds
for its ailing banking sector.
Sterling was little moved by a new 80 billion pound 'funding
for lending' scheme announced by the Bank of England and UK
Treasury on Friday, which they hope will help lift the economy
out of recession. [ID: nL9E8HQ00H]
(Reporting by Michael Szabo; Editing by Ruth Pitchford)