Sterling rises versus euro on sovereign funding concerns

Tom Tong12/Jan/2011Currency Updates

GBP

Sterling hovered close to a four-month high versus a struggling euro on Tuesday as sovereign funding worries plagued the single currency and caused a sharp euro sell-off.

Sterling appreciated versus the euro for five of the past six days amid mounting concern that Portugal will be forced to seek a bailout and that demand will suffer when the southern European country auctions 2014 and 2020 bonds today.

The pound managed to sustain a rally against the dollar even as economists anticipated that BoE policy makers will maintain their emergency stimulus this week and keep interest rates on hold. The central bank is expected to keep the rate at a record low of 0.5 percent and maintain the size of its bond- stimulus plan at 200 billion pounds.

EUR

The euro traded close to four month lows versus the pound and seesawed versus the dollar on Tuesday as the market’s focus firmly remained on whether Portugal will be able to raise funds in the debt market on Tuseday.

The alternative for Portugal may be to turn to the European Union and IMF for financial aid. Bond auctions in Spain and Italy will be closely scrutinized as the week progresses.

The euro was able to make some ground up on the dollar after Japan pledged to buy bonds backed by the European government. Japan has pledged to buy more than 20 percent of the forthcoming bond issuance from the European Financial Stability Fund, helping to soothe the latest round of Eurozone concerns.

USD

On an extremely light day for macro-economic data from the US, the dollar lost ground both the pound and the euro.

The main reason behind the dollar’s losses can be attributed to poorer than anticipated employment data coupled with European bond purchases from Japan and speculation of mounting pressure on the Bank of England to increase interest rates in the near term, creating a more supportive environment for risk assets.

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Written by Tom Tong

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