LONDON (Reuters) - Sterling rose to a near 9-month high against the euro on Wednesday as deepening concerns that euro zone debt problems will spread beyond Greece battered the single currency.
Worries about Greece overshadowed uncertainty ahead of Thursday’s UK election, from which opinion polls still suggest no one party will emerge with a clear majority.
Fears the euro zone debt crisis may not end with Greece added to safe-haven demand for the dollar and pushed sterling to a five-week low versus the U.S. currency.
“Sterling’s apparent strength is all about Greece and euro weakness. It is probably not the true sterling picture,” said Gavin Friend, currency strategist at nabCapital.
By 4:45 p.m., the euro was down 0.8 percent at 85.10 pence, after hitting a near 9-month low of 84.94 pence earlier.
Technical analysts said the door was open for a decline to the June 2009 low of 84.00 pence.
Sterling’s strong gains against the euro helped push it up on a trade-weighted basis to 80.2, its highest since mid-February.
Against the dollar sterling was down 0.2 percent at $1.5111, having hit a five-week low of $1.5068.
Sterling sentiment was weighed down by uncertainty ahead of a closely fought general election as party leaders criss-crossed Britain making a final push for votes.
Latest opinion polls show a slight rally for the ruling Labour Party, but no one party was seen gaining a clear majority in parliament. The opposition Conservative Party are the most likely to win a majority.
“It would take a sizeable Conservative Party victory to foster a break-out to the topside, whereas a more muddled outcome of a hung parliament and lingering uncertainty over the weekend would likely provoke a knee-jerk reaction in the opposite direction,” said Daragh Maher, deputy head of FX strategy at Credit Agricole CIB.
Investors worry that a coalition government would struggle to take the tough measures needed to bring down the UK’s deficit of around 12 percent of economic output.
nabCapital’s Friend said the market’s focus on the euro was likely to mean a sterling negative election result would be reflected in falls in sterling/dollar rather than in a rise in euro/sterling.
The single currency tumbled to a 14-month low below $1.29 against the dollar.
Investors sold the euro on fears of contagion that deepened even after Greece sealed an agreement at the weekend for an unprecedented aid package from its European partners and the International Monetary Fund.
“The announcement of the Greek package has failed to break the negative momentum in asset markets and it is unclear what can stabilise sentiment,” said Adarsh Sinha, currency strategist at Barclays Capital.
Data on Wednesday showed the purchasing managers’ index for the UK construction sector accelerated at its fastest pace since September 2007 last month, helped by rising new orders.