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Sterling falls to 3-week low versus euro

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GBP

Sterling saw a drop against a basket of currencies on Thursday, notably hitting a three-week low versus the euro as oil prices drove investors into safe haven currencies, increasing concerns over what we all know to be an already UK economy.

Although sterling remained supported by expectations that the Bank of England will raise interest rates in the coming months, city analysts predicted that much of the hawkish outlook seen on Wednesday when BoE minutes showed one more policymaker voting for a rate rise had been priced in to the pound, leaving limited room for further gains.

UK rate expectations have been boosted both by hawkish BoE commentary and a recent spike in UK inflation, but a survey showing a sharp slowdown in UK retail sales growth also highlighted the vulnerability of the economy.

Against the dollar, sterling was down 0.6 percent yesterday, a swift retreat from Wednesday's high.

EUR

A good day for the euro saw it strengthen to a three-week high against the dollar on speculation that European Central Bank officials could signal a potential interest rate rise to combat inflationary pressure.

The single currency headed for a second weekly gain versus the greenback before a report today stating that German consumer prices rose the most in two years.

“The ECB is likely most worried about wage-induced inflation and, should this occur, the bank will probably have to consider a rate increase,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “This may be why the euro is trading very firmly,” he added.

“European interest rates can only rise in the future”, ECB Governing Council member and outgoing Bundesbank President Axel Weber said yesterday in Frankfurt. The central bank’s Vice President Vitor Constancio speaks today in New York and Governing Council member Mario Draghi gives a speech tomorrow in Verona, Italy.

Futures markets further indicated yesterday that traders are adding to bets for higher borrowing costs. The implied yield on three-month Euribor futures for December rose to 1.96 percent from 1.90 percent a week earlier. The ECB, which next meets March 3, has kept its benchmark rate at 1 percent since May 2009. As such, Morgan Stanley was among the first banks to review their forecast for the euro, citing increased rhetoric from the ECB over the need for tighter monetary policy to combat inflation.

Crude for April delivery climbed to $103.41 per barrel in New York yesterday, the most since September 2008, on concern supplies will be disrupted. Oil pared gains to $97.23 a barrel on assurances by the US, Saudi Arabia and International Energy Agency that they can compensate for any disruption in Libya.

“We saw a sharp drop in futures crude prices last night so this helped to improve sentiment in Asia,” said Mirza Baig, a currency strategist at Deutsche Bank AG in Singapore. “We remain wary of the oil situation as the pain threshold for Asia is around $115 to $120 per barrel. Anything above there and we will start to see current accounts turning into deficits,” he continued.

USD

The dollar incurred significant losses early in Asia, hovering above a record low versus the Swiss franc as investors sought safety in other currencies on fears over the unrest in Libya spreading to other oil-producing states.

However, a sharp retreat in oil prices from 2-1/2 year highs, sparked by an unsubstantiated rumour that Mummar Gaddafi had been shot and Saudi Arabia's assurances that it can counter Libyan supply disruption could offer the dollar a brief respite.

The dollar dipped to an all-time low versus the Swiss franc as well as a three-week low against the yen.

Elsewhere

New Zealand’s dollar advanced after announcements yesterday regarding the safeguard of the nation’s credit rating. The Kiwi strengthened against all of its major counterparts after S&P said the nation’s credit ratings were not “immediately affected” by the deadliest earthquake in 80 years rising 0.6 percent against the USD and U.S. 0.6 percent against the yen.

Further violence in Libya sent the yen and Swiss franc to higher levels as demand for safer assets increased. Muammar Gaddafi, who has lost control of much of his country’s oil-rich east, appealed on state television for an end to violence as his forces stepped up a crackdown on opponents.

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