Monday, 21 November 2011

Sterling hits 6-week low vs dollar on flight from risk

* Sterling falls to 6-week low of $1.5612
* Speculators add to bearish bets against cable
* Eur/GBP higher, but euro's gains likely capped

By Neal Armstrong

LONDON, Nov 21 (Reuters) - Sterling fell to a six-week low against a firm dollar on Monday and struggled against the euro as investors shunned riskier assets, though anxiety about euro zone debt contagion is likely to limit losses against the common currency.

Sterling was down 1 percent on the day at $1.5633, having fallen to $1.5612, its lowest since Oct. 12.

The dollar index rose to a six-week high as investors sought safety from the euro zone crisis, while the failure of U.S. leaders to agree to deficit-cutting measure led to a broad sell-off in riskier assets and currencies.

"It's a risk-off day and sterling has been under pressure as a result. I think there is potential for cable to weaken further towards $1.53 by the end of the year," said Michael Derks, chief strategist at FxPro.

Technical analysts said sterling had found support around the 61.8 percent retracement of its October rally at $1.5613. A daily close below there would be a bearish sign.

Sterling was also vulnerable from a fragile UK economy and the likelihood of further Bank of England asset purchases. Latest data showed speculators had added to their bearish positions on sterling in the latest week to Nov. 15

On Wednesday, minutes from the BoE's latest monetary policy committee (MPC) meeting will be released. At the meeting the MPC left its main interest rate unchanged at 0.5 percent and the target for asset purchases steady at 275 billion pounds.

Analysts expect the minutes to reflect policymakers' readiness to extend quantitative easing further. Last week, BoE policymaker Martin Weale said there was a "very strong case" for extending the central bank's QE programme next year.

Another BoE policymaker, Adam Posen -- a perennial dove --also argued that high inflation was not a threat and the economic outlook had turned out to be grim, as forecast. .

Data showed on Monday that UK shopper numbers between August and October fell at the fastest rate since last December's heavy snow, as cash-strapped Britons tightened their purse strings.

"We expect sterling to remain an underperformer and anticipate any near-term rebound in GBP/USD to remain limited," Morgan Stanley analysts said in a note. The firm has a near-term target of $1.5630.


Britain's Prime Minister David Cameron acknowledged that slow growth is making it harder than expected for the country to cut its deficit, but even a temporary fiscal stimulus to boost the economy would be "dangerously wrong".

The UK still retains its AAA credit rating, mainly because it has been pruning expenditure and is trying hard to get its debt under control by following a tight fiscal policy.

Against the euro, sterling came under pressure as traders reported strong sterling selling from a UK clearer. The euro was up 0.7 percent at 86.10 pence.

"This is a reflection of the sheer weight of selling in sterling from a variety of players but there is still a desire to diversify out of a crumbling euro and sterling should benefit from that," said Derks. 

(Additional reporting by Anirban Nag; Editing by John Stonestreet)