March 16, 2020 / 9:31 AM / 23 days ago

Sterling gains after U.S. rate cut, struggles vs euro

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, March 16 (Reuters) - Sterling bounced against the U.S. dollar but hit a new six-month low against the euro on Monday, as money markets digested a further surprise cut to U.S. rates to rock-bottom levels by the Federal Reserve in the face of the coronavirus pandemic.

The Fed cut rates to a target rate of 0% to 0.25% on Sunday, while five other central banks including the Bank of England took steps to relieve a shortage of dollars and provide extra liquidity as part of a global coordinated action.

The dollar fell against a basket of currencies on Monday. Rate cuts typically weigh on a country’s currency by making investments in that currency less attractive, although the dollar’s fall was tempered somewhat as it is seen as a safe bet in times of crisis as the world’s most liquid currency.

The pound was last up 0.6% against the U.S. dollar at $1.2355. It was briefly in negative territory earlier in the day as coronavirus fears continue to dominate, with sterling matching Friday’s five-month low of $1.2250.

The pound performed less favourably versus the dollar than other currencies seen as safer havens such as the Japanese yen and Swiss franc and to some extent, the euro.

As a result sterling fell to a new six-month low against the single currency, last down at 90.95 pence per euro.

“The euro is currently profiting (after the Fed cut) as it is seen as a safe haven over the pound,” said Kenneth Broux, FX strategist at Societe Generale.

“Both the UK and euro zone economies are likely to see a negative quarter or two of growth at least. But the euro zone has a current account surplus, it doesn’t rely on foreign investment to the same extent.”

He added that the Bank of England may have to announce more stimulus measures after its next meeting on March 26, including potentially cutting rates further or restarting quantitative easing asset purchases.

Money markets are already pricing in nearly a 30% probability of a quarter-point rate cut at the BoE’s next policy meeting. (Reporting by Iain Withers; Editing by Saikat Chatterjee and Catherine Evans)

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