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Tuesday January 20, 2009 - 11:36:56 GMT
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FOREX NEWS-Stg at 7-1/2 yr low vs dlr, grim outlook hits euro


Tue Jan 20, 2009 6:28am EST

* Pound tumbles over 3 pct vs dollar to 7-1/2 yr low

* Euro drops to 6-week low vs dollar, dlr index at 6-wk high

* Better-than-expected German ZEW fails to lift euro

* UK banking woes weigh on pound; euro hit by grim outlook

(Adds quotes, updates prices)

By Jessica Mortimer

LONDON, Jan 20 (Reuters) - The pound fell over 3 percent on Tuesday to a 7-1/2 year low against the dollar below $1.40 as banking sector woes battered the currency, while the euro also dropped to a six-week low versus the dollar.

Sterling has been in freefall since the Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) announced the biggest losses in UK corporate history on Monday and is heading towards levels not seen in over two decades.

The euro fell over 1 percent against the dollar as fears about the health of the euro zone economy gripped investors. On Monday the European Commission forecast a 1.9 percentage shrinkage in the euro zone economy in 2009 and Standard & Poor's downgraded Spain's credit rating.

A bigger-than-expected improvement in Tuesday's German ZEW economic sentiment survey for December to -31.0 from -45.2 [nLK468724] failed to lift the euro, while the pound showed little reaction to data showing UK December inflation fell by less than forecast.

"The ZEW index showed a big improvement but it has done nothing for the euro," CMC Markets analyst James Hughes said.

He added that investors are concerned that the European Central Bank will have to cut interest rates further after their 50 basis point reduction to 2.0 percent last week in order to stave off a deep recession in the single currency bloc.

At 1045 GMT the pound was down 3.1 percent against the dollar to $1.4006 <GBP=>, having earlier hit $1.3937, its lowest level since July 2001. A level below $1.3682 would take sterling to its weakest in over 20 years.

The euro fell 1 percent against the dollar <EUR=> to $1.2984, not far above an earlier six-week low of $1.2923.

The declines in the pound and the euro helped push the dollar to a six-week high against a basket of currencies of 85.993 .DXY, while optimism ahead of Barack Obama's inauguration as U.S. president also lent support.

"The Obama euphoria is dollar positive and the biggest casualty of this is sterling because by contrast sterling sentiment is really bad," Commerzbank currency strategist Antje Praefcke said.

The low-yielding yen also gained as global recession worries made investors wary of taking on risk, despite a modest rebound in stocks. The dollar dipped 0.1 percent to 90.53 yen <JPY=>, while the euro dropped 1.2 percent to 117.50 yen <EURJPY=R>.


UK inflation data showed CPI dropping to 3.1 percent in December from 4.1 percent in November [ID:nONS004006].

Although this is the steepest drop in prices since April 1992, the headline reading was above forecasts for a drop to 2.7 percent.

CMC Markets' Hughes said the data will help stave off fears of deflation in the UK, but the pound failed to benefit as it continues to suffer the effect of Monday's massive RBS losses and a second UK bank bailout.

Britain threw another lifeline to banks on Monday, offering guarantees on their debt and setting up a 50 billion pound fund to buy up assets and get cash flowing again.

Any optimism in the wake of the announcement quickly dissipated, with concerns resurfacing about UK fiscal deterioration while analysts interpreted the asset-buying fund as a first step towards unconventional quantatitive easing.

"Yesterday's bank bailout is making everyone nervous," CMC's Hughes said.

The Bank of England cut interest rates to a historic low of 1.50 percent earlier this month, but analysts forecast more cuts in the coming months as the economic slowdown shows no sign of abating.

The Canadian central bank is set to be the latest in a string of global monetary authorities to slash rates, with a cut of 50 basis points to a fresh 50-year low of 1.00 percent forecast on Tuesday.

(Reporting by Jessica Mortimer)

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