LONDON, Feb 26: Sterling steadied just above the previous day’s four-year low on the euro and two-month trough on the dollar on Wednesday as investors paused to assess how much bad news is priced in following a major selloff this week.
The pound took a beating on Tuesday after Bank of England Governor Sir Edward George said it was hard to know how much more the pound could fall following recent selling, while the Bank’s chief economist Charles Bean said Britain’s current account gap may require a further drop in the exchange rate.
The risk premium which the euro has over the United States is no longer shared by sterling, said Steven Pearson, chief currency strategist at Halifax Bank of Scotland Treasury Services.
The correlation between euro/dollar and cable (sterling/dollar) has turned negative in recent weeks because of a downgraded view of the UK economy on a relative basis and the fact that investors are more averse to holding sterling than euros because of the UK’s close involvement with the U.S. in confronting Iraq.
Sterling bounced to 68.13 pence per euro having fallen as far as 68.63 on Tuesday. Against the dollar it rose to $1.5794 from the previous session’s low of $1.5700.
The dollar, in part helped by its gains against the yen, traded with a firmer bias against the euro and the Swiss franc.
Against the yen, sterling edged away from its five-month low also set on Tuesday to stand at 185.22 yen.
British fourth-quarter GDP data on Wednesday showed growth at its weakest for a decade, although double that of the euro zone.
The economy grew by 0.4 per cent in the fourth quarter of last year from the previous quarter, but the year-on-year growth rate for the period came in slightly lower than previously estimated at 2.1 per cent.
Analysts said investors were keen to see how the economy performed this year, given a series of poor data on retail sales and manufacturing in January.
Sterling’s fall can be traced back to earlier this month when the BoE cut rates, which took away the interest rate advantage. The BoE’s recognition the UK economy is not as healthy as it had thought and geopolitical concerns have also weighed, said Bilal Hafeez, currency strategist at Deutsche Bank.
The BoE surprised the market on February 6 by cutting rates by 25 basis points to a 48-year low of 3.75 per cent.
Then yesterday’s...unusual comments from the central bank spooked the market.
The question now is how much bad news is priced in, but my view is that at this stage investors should not fight the trend, Hafeez said.
MUMBAI: The Indian rupee ended at a 17-1/2-month closing high on Wednesday as exporters, betting the local unit will gain more, dumped the greenback in the absence of importer buying or noteworthy central bank intervention.
The rupee closed at 47.6800/6850 per dollar, rising from Tuesday’s finish of 47.7125/7200 to the highest close since September 13, 2001, when the unit ended at 47.5550/5650. It was traded at an intra-day high of 47.6650.
The lack of support for the dollar spooked exporters, said a trader at a state-run bank. They sold, expecting the next resistance at 47.65.—Reuters