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Wednesday January 21, 2009 - 22:24:27 GMT
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FOREX-Pound rebounds from 23-yr lows vs dollar on G7 news

Wed Jan 21, 2009 5:04pm EST

* News that G7 will address currency weakness boosts pound

* Euro rises in late trading

* Dollar falls vs yen as FX options expire

* S&P downgrades Portugal's credit rating (Recasts, adds details and quotes, changes byline)

By Vivianne Rodrigues

NEW YORK, Jan 21 (Reuters) - The British pound rebounded from a 23-year low against the dollar on Wednesday after a source told Reuters that its slide will be discussed at the next meeting of the Group of Seven industrialized countries.

The pound, which had been driven down on fears about the UK banking sector, was also helped by a late afternoon rally on Wall Street. The equities gains also lifted the euro more than 1 percent against the dollar as safe-haven flows into the U.S. currency slowed.

The pound has been under steady pressure this week as a government rescue package for struggling British banks failed to reassure investors or stem losses in banking stocks. At one point on Wednesday, sterling fell to $1.3622, its lowest level since 1985.

The declines came after shares of Barclays Plc (BARC.L) tumbled by as much as a third in value to a 24-year low in London on the threat it needs to raise funds or could be nationalized. Barclays pared losses to close down 9.3 percent. Shares in rival Lloyds Banking Group also fell sharply. For details, see [ID:nLL283101]

"We are seeing the end of a financial bubble in the UK that has lasted for about four or five years," said Roger Kubarych, chief U.S. economist at Unicredit Markets and Investment Banking in New York. "The pound and every other asset in the UK was extremely overvalued. Now, it's all coming down."

Still, the pound rallied against the dollar and trimmed losses versus the euro in late trade after a source said sterling weakness will be discussed at the next G7 meeting in February. For details, see [ID:nLL70613].

The G7 news cane after France's economy minister, Christine Lagarde, said the Bank of England should take more steps to support sterling. [ID:nLL742265]

Sterling was last 0.5 percent higher at $1.3973 <GBP=> after moving in a $1.3622-$1.4021 range on the day. The euro trimmed gains to 92.99 pence <EURGBP=>, after hitting intra-day lows at 92.56 pence.

Elsewhere, the dollar fell to 87.10 yen, according to EBS, its lowest level against the Japanese currency since 1995, before recovering some ground amid the late afternoon rally on Wall Street. It last traded at 89.40 <JPY=>, down 0.4 percent.

The greenback was initially driven lower by rising risk aversion and a flurry of dollar/yen options that expired without being exercised, leading options holders to sell the U.S. currency.

The euro fell as low as 112.08 yen <EURJPY=>, a near seven-year low, before recovering to 116.66 yen, up 0.8 percent. Against the dollar, it was last up 1.2 percent at $1.3040 <EUR=>.

"The moves have been quite dramatic so it's not entirely surprising to see a bit of a correction here," says Vassili Serebriakov, currency strategist at Wells Fargo in New York.


The rapid gains in the yen raised speculation Japanese authorities may intervene to stem the rise in the currency.

"At this pace, soon the yen may hit levels that will bring some 'verbal' intervention back to the market," said Todd Elmer, a currency strategist at Citigroup in New York.

The Swiss National Bank, meanwhile, said it may use unlimited foreign exchange intervention to weaken the Swiss franc and avert deflation.[ID:nZAT008113]. That pushed the euro and dollar higher against the franc, with the dollar touching $1.1615 francs <CHF=>, its highest level since early December.

Also in Europe, Portugal became the latest euro-zone economy this year to be hit by a rating downgrade by Standard & Poor's, following Greece and Spain [ID:nLL738555].

Analysts said that could continue to weigh on the euro.

"While the U.S. economy is obviously in a bad state, the euro zone economy is in a much, much worse-case scenario than the U.S.," said Matt Esteve, a foreign exchange trader at Tempus Consulting in Washington. "The downgrading of Portugal is just evidence of that." (Additional reporting by Steve C. Johnson, Wanfeng Zhou, Gertrude Chavez-Dreyfuss and Nick Olivari; Editing by Leslie Adler)

© Thomson Reuters 2009 All rights reserved



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