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Sterling slides against euro

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GBP

Sterling dropped against the euro to levels not seen for four and a half months over Thursday after disappointing sales data raised fresh worries over a fragile recovery. This was not helped by Moody’s warning that slower growth than currently seen could have an adverse effect on Britain’s credit rating.

Concerns that a weak economy could push back the timing of a Bank of England interest rate rise pushed sterling lower just as the euro gained steam, with investors shrugging off doubts over Portugal as they anticipated a Eurozone rate hike next month.

The single currency jumped 1.4%, its strongest since early November. This left it on track to test the November 4 peak and helped push the pound to its lowest in 2011 versus a currency basket.

British retail sales in February fell 0.8% on the month against forecasts for a smaller decline of 0.6%, sharply slowing the annual rate of growth to 1.3% from a downwardly revised 5.1% in January.

“The (retail sales) data suggests that the Q1 bounce-back in the wider economy could be modest at best, with the Q4 decline in GDP reflecting a more structural slowdown," said Simon Smith, chief economist at FxPro.

Minutes released on Wednesday from the BoE's last policy meeting showed a 6-3 vote in favour of leaving interest rates on hold in March, unchanged from February, and gave no hints of any more policymakers joining the hawks' camp. On Wednesday, Britain's finance minister, George Osborne, cut the 2011 UK economic growth forecast to 1.7% from 2.1%. Osborne said soaring oil prices meant inflation would stay between 4 and 5% this year.

USD

The dollar hovered near a 15-month low against a basket of currencies and was in sight of a 29-year trough against the Australian dollar as a bounce in equities suggested that risk appetites were on the mend.

The greenback made gains against the euro after Standard & Poor's downgraded Portugal's credit ratings and warned it could cut it again, the trend was reversed and further gains clipped by an increase in demand for the single currency from the Asian market.

Analysts said the broader picture was one of dollar weakness on the back of a recovery in global equities and improving risk sentiment, while the euro had become somewhat resilient to ratings downgrades given that much of the Eurozone's fiscal woes have been priced into its value.

"The market is treating many of these downgrades as rear-guard action which is already well discounted and the dollar is under pressure broadly," said Todd Elmer, currency strategist at Citi in Singapore. "This will continue to support the euro even if we do see some marginal negative news on the sovereign debt crisis," he continued.

EUR

The single currency rebounded on Friday after sliding downwards on Thursday. Traders suspected Asian sovereign names had been buying the euro around that level.

The session saw EURUSD put back into view a 4 1/2-month high earlier in the week, and analysts including Elmer at Citi expected the euro to soon retest that level, and subsequently $1.4283, a peak in early November.

European leaders agreed on Thursday to increase their financial rescue fund to the full 440 billion euros by June, but avoided discussing Portugal which is under pressure to seek a bailout after its prime minister resigned on Wednesday night

The euro shrugged away any concerns over fiscal issues of the highly-indebted Eurozone countries such as Portugal because many expect the ECB to raise interest rates as early as April.

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