February 25, 2016 / 6:31 PM / 2 years ago

Sterling hits seven-year low, caps ugly week on Brexit concerns

LONDON (Reuters) - Sterling hit a seven-year low against the dollar on Friday, dogged by persistent worries about a possible British exit from the European Union which left the currency on track for its biggest weekly loss since 2009.

Sterling fell 0.65 percent to $1.3867 GBP=D4, on course for a 3.7 percent weekly fall. It lost ground in afternoon trade in London after data from the United States showed the economy grew at a much faster pace than earlier estimated in the fourth quarter. ECONUS

The euro was down 0.15 percent at 78.65 EURGBP=D4, having hit a 14-month high of 79.28 pence on Thursday. The single currency came under pressure as rising stock markets made investors less inclined to pile into safe-haven and low-yielding currencies, including the yen and the euro.

British voters will decide on June 23 whether to stay in the EU, and sterling has been hit by worries that a “Brexit” would threaten the huge foreign investment flows the country needs to balance its current account deficit, one of the biggest in the developed world at around 4 percent of output.

Selling accelerated this week as companies and investors rushed to protect themselves against that risk. Some sellers are targeting $1.35 and below, levels last seen when the pound sank towards parity with the dollar in the mid-1980s.

The drop has been so dramatic that it prompted a rare comment on economic matters from Foreign Secretary Philip Hammond, a pro-European, who said it offered a “foretaste” of the impact leaving the EU.

Chancellor George Osborne said the currency’s decline was a reminder that the outcome of the referendum would have economic consequences.

“Investors continue to favour selling sterling rallies,” said Josh O‘Byrne, currency strategist at Citi. “Though the scale of the move looks exaggerated, there seems no obvious trigger for recovery.”

The pound has also been undermined by expectations that an exit would push back the horizon for a Bank of England interest rate rise. HSBC, Britain’s biggest bank, has said the currency could lose up to 20 percent of its value and growth could be up to 1.5 percentage points lower next year if Britain voted to leave.

Most polls have shown the “In” camp with the upper hand, but the lead is being chipped away by “Out” proponents. Bookmakers see around a one-in-three chance of an exit.

“The next round of opinion polls regarding the UK referendum is likely to set the pace for next week’s trading,” Rabobank analysts said in a note.

“That said, while sterling is clearly still very vulnerable, a more pragmatic tone already appears to be tentatively emerging in response to the combined signals from opinion polls and bookies.” 

Editing by Alison Williams and David Holmes

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