November 27, 2009 / 4:37 AM / 11 years ago

Sterling slides on Dubai debt concerns

LONDON (Reuters) - Sterling fell on Thursday, hitting its weakest in a month against the euro and a basket of currencies, on worries about British banks’ potential exposure to debt problems in Dubai.

Dubai’s shock move on Wednesday to restructure Dubai World, and delay repayment on some of the company’s $59 billion of liabilities, sent ripples through financial markets, denting equities and riskier currencies.

Some traders and analysts said sterling was underperforming because of concerns that some UK banks may be exposed, although no exposure was confirmed.

“There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure,” said Ian Stannard, currency strategist at BNP Paribas.

European bank shares fell more than 3 percent early on Thursday on concern about their potential exposure to Dubai debt problems. The fall was led by HSBC, Standard Chartered, Barclays, Deutsche Bank and Royal Bank of Scotland.

London share prices were frozen after trading was halted around 1030 GMT by a technical glitch.

Standard Chartered said the bank did not comment on specific clients. Deutsche Bank and RBS declined to comment, and HSBC and Barclays were not immediately available.

At 12:49 p.m., the euro was up 0.5 percent at 91.02 pence. Earlier, the single currency broke above 91 pence for the first time in a month to hit a high of 91.29 pence.

On a trade-weighted basis the pound hit a one-month low of 79.8.

Sterling fell 1.1 percent against the dollar to $1.6537, having earlier hit a low for the session of $1.6500 as the U.S. currency recovered after hitting 15-month lows on a trade-weighted basis.

“With the shock debt request from Dubai hanging over, until we know more about it today is not the day to expect the dollar to continue making new lows,” said Gavin Friend, currency strategist at nabCapital.

He said sterling had been “disproportionately hit,” and added, “There has been a lot of conjecture and rumour and it is unsubstantiated at this stage - we can’t say with any certainty that it will hit UK banks.”

Against a broadly firmer Japanese yen, sterling fell close to 2 percent to hit a six-week low of 143.30.

ECONOMIC CONCERNS

Some traders said moves were exacerbated by thin trading due to the U.S. Thanksgiving holiday, while falls on equity markets encouraged selling of perceived riskier currencies, including sterling.

Lingering concerns that any economic recovery will be slow weighed on the pound meanwhile, after data on Wednesday showed the economy shrank by 0.3 percent in the third quarter

“The GDP data saw a modest upward revision, but that has not changed the bigger picture that the UK is lagging other countries such as the euro zone in terms of its recovery,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

For a graphic on comparative growth rates in the UK, euro zone and the U.S. click on:

here

Additional reporting by Jamie McGeever, editing by Nigel Stephenson

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