Sterling drops against dollar as interest rates held; Earthquake hits Japan

Tom Tong11/Mar/2011Currency Updates

GBP

Sterling fell to a near two-week low against the dollar on Thursday after the Bank of England kept interest rates on hold as expected, as investors who had bet on an outside chance of a hike cut positions.

Traders said more downside stops are positioned below the pound’s trough hit on February 25 as some investors pare expectations of aggressive rate hikes by the BoE this year.

The BoE, which left rates at their record low of 0.5 percent, is widely expected to increase borrowing costs in the coming months, to combat inflation that is running well above target. But investors who were pricing in chances of at least three 2011 rate hikes by the BOE have started to pare back some of those expectations.

“The price action in sterling/dollar and euro/sterling following the rate decision suggests that markets had positioned slightly for the potential of a shock BoE rate hike,” said Greg Anderson, currency strategist at Citi.

The BoE made no statement alongside its decision, and the voting pattern will be announced in minutes in two weeks’ time. These are likely to reveal a lively debate, given three out of nine policymakers voted for a hike in February.

Sterling was down 1 percent against the dollar, its lowest since 25th February and more than 1 cent below where it was trading prior to the BoE announcement.

The pound cut earlier gains to trade weaker against the euro with the single currency up 0.2 percent.

EUR

The euro came under broad selling pressure after a cut to Spain’s credit rating by Moody’s highlighted the debt problems facing several Eurozone countries. But expectations that the European Central Bank will raise rates before the UK central bank supported the euro against the pound.

Analysts are expecting the ECB to raise rates as early as next month, while investors are fully pricing in a first 25 basis points rate hike by the BoE in July.

USD

The dollar gained broadly against its rivals on Thursday as Eurozone debt worries and reports of violence in Saudi Arabia triggered safe-haven investment flows.

The dollar bounced back against the euro, in a reversal largely fueled by doubts as to whether the Eurozone can successfully resolve its sovereign-debt crisis as Eurozone leaders meet this month, including a March 24-25 summit. In addition, analysts say that if the European Central Bank does raise interest rates in coming months, as expected, it could make borrowing costs unsustainable for the troubled economies on its periphery. Earlier Thursday, Moody’s downgraded Spanish government debt to Aa2 with a negative outlook from Aa1 previously, adding to the euro’s losses.

JPY

The yen slumped across the board last night as news that the biggest earthquake to hit Japan in 140 years struck the northeast coast this morning, triggering a 10-metre tsunami that swept away everything in its path, including houses, cars and farm buildings which had caught on fire.

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Written by Tom Tong

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