May 26, 2009 / 3:31 PM / in 11 years

Pound bounces back after U.S. data

LONDON (Reuters) - Sterling recovered from an earlier slide against the dollar on Tuesday after a strong improvement in U.S. consumer confidence beat market expectations, prompting demand for riskier assets.

The U.S. confidence indicator rose to 54.9 in May, adding to hopes that the global slowdown was easing and spurring demand for currencies like sterling and the euro against the dollar.

“(The confidence data) has swivelled the market sentiment back towards buying risky assets,” said Lauren Rosborough, senior currency strategist at Westpac in London.

“The market is completely focussed on the dollar at the moment.”

With no major UK data or events on Tuesday, analysts said that sterling was following moves in the dollar and other asset markets. Currency movements were aggravated in thin liquidity as traders in London and New York returned from market holidays.

By 3:38 p.m., sterling was flat on the day at $1.5922, rebounding from a fall earlier to as low as $1.5778. Helping the pound was a 1.0 percent rise in UK shares .FTSE, which bounced back from earlier losses on the U.S. data.

It had fallen in early trade as the euro and global stocks fell, and the dollar gained.

Sterling has rallied dramatically against the dollar this month on the view that a recovering global economy will prompt demand for undervalued UK assets, hitting $1.5947 last week — its highest since early November.

“Cable strength isn’t over,” said Neil Jones, head of European hedge fund sales at Mizuho in London.

“A return of market stability will prompt global investors to start moving away from cash holding and begin looking for bargain assets.”

MORE TO COME

The pound brushed off last week’s downward revision to the UK’s credit rating outlook to post a roughly 5 percent gain against a broadly weak dollar, and market participants expect it to climb further.

Mizuho’s Jones said that UK assets, including property and stocks, have been hit hard in the past year or so, making them cheap and attractive buys, particularly for overseas investors, given sterling’s significant depreciation since summer.

The euro also fell 0.3 percent to 87.69 pence.

Given a lack of major UK data releases and economic events this week, market participants said that movements in sterling would likely be driven by share prices and market confidence.

Hefty issuance of U.S. Treasuries will also be in focus this week amid recent concerns about the U.S. government’s ability to finance its debt as the country borrows heavily to steer the economy out of a recession.

Reporting by Naomi Tajitsu; editing by Patrick Graham

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