Wednesday August 13, 2008 - 12:16:06 GMT
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Reuters - www.reuters.com
FOREX NEWS-Sharp sterling slide on BoE report lifts dollar
(Recasts, updates with quotes, comment. Changes byline)
* Sterling tumbles after BoE inflation report, below $1.88
* UK pound's fall fuels dollar gains; dlr index up 0.3 pct
* U.S. retail sales up next: seen -0.1 pct in July
By Jamie McGeever
LONDON, Aug 13 (Reuters) - Sterling fell to its lowest in
almost two years against the dollar on Wednesday after the Bank
of England signalled it could cut interest rates sooner rather
than later, a drop which set the stage for a broad dollar rally.
The BoE said in its quarterly inflation report that
inflation would spike up close to 5 percent before falling back
dramatically to below its 2 percent target within two years,
prompting a massive adjustment in UK interest rate markets.
UK rates markets moved aggressively to price in an almost 80
percent chance of a quarter point rate cut by the end of the
year, fully discounted policy easing by January, and even
attached a more than 50-50 chance of another cut by February.
Sterling's trade-weighted index hit its lowest since
January, 1997 and its losses sparked a broad recovery in the
dollar, which had been mostly weaker earlier in the day as
dealers took profits from its hefty gains in recent weeks.
Some analysts said deteriorating growth in the UK, euro zone
and other economies contrasted somewhat with the situation in
the United States. Data on Tuesday showed the U.S. trade gap
narrowed sharply, suggesting U.S. growth might not be as weak as
"Given the shift in fundamentals highlighted by the
inflation report and the U.S. trade balance yesterday, we can
expect at least part of the (dollar) move we've seen in recent
weeks will not reverse" in the near term, said Thomas Stolper,
currency strategist at Goldman Sachs.
"Markets are getting whipped around. Yesterday we had (UK)
inflation at new highs ... and today we have the BoE seemingly
prepared to look through that," Stolper said.
At 1145 GMT sterling was down 1 percent on the day at
$1.8770 <GBP=>, having fallen as low as $1.8737, its lowest in
The euro was up 0.8 percent at 79.30 pence <EURGBP=>, while
trade-weighted sterling fell as low as 91.3, a level not seen
since January 1997 <=GBP>.
The euro reversed earlier gains against the dollar to trade
down 0.25 percent at $1.4880 <EUR=>, and the dollar index rose
almost a third of a percent to 76.35 .DXY, back toward the
six-month high of 76.616 set the previous session.
The dollar was down 0.3 percent against the yen at 108.85
SHORT DOLLAR UNWIND
For more on the BoE inflation report and cross-asset market
reaction to it, click on [ID:nBOE001516] and [ID:nLD254364].
Currency traders on Wednesday focused less on oil and
equities than in recent weeks, looking instead to growth. Fears
about the health of the global economy were fanned by data that
showed Japan's economy shrank 0.6 percent in the second quarter.
This was in line with expectations but the annualised figure
fell slightly faster than expected, by 2.4 percent. That report
reinforced views the country had slipped into a recession after
its longest period of expansion since World War Two. [JPGD1=ECI]
Second quarter German gross domestic product figures on
Thursday are expected to show a 0.8 percent contraction in the
euro zone's biggest economy.
This may encourage market participants to shrug off the
lingering concerns over the U.S. banking sector and further
unwind bets against the dollar that had, until last month,
largely been extremely profitable.
"Longer-term players are short dollars and increasingly
uncomfortable after last week's dramatic rally. The slide in
financials may remind us that all is not well with U.S.
fundamentals but for now the imperative is ... to rebalance
positions in preparation for a more global recession," JP Morgan
FX analysts said in a note.
"For now this entails buying dollars. It is highly doubtful
whether today's retail sales numbers will alter this."
July U.S. retail sales data at 1230 GMT are expected to show
a fall of 0.1 percent. See [ECON].
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