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Wednesday July 4, 2007 - 09:40:11 GMT
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FOREX NEWS-Sterling vaults 26-yr high vs dlr, high-yielders firm

FOREX-Sterling vaults 26-yr high vs dlr, high-yielders firm
Wed Jul 4, 2007 4:24AM EDT

(Changes dateline, byline, adds quotes, updates prices)

By Veronica Brown

LONDON, July 4 (Reuters) - Sterling jumped to a 26-year high versus the dollar for a third day on Wednesday, vaulting $2.02 and showing no signs of vertigo yet at the expense of a broadly weak dollar that stayed near record lows versus the euro.

The greenback, dogged by troubles in the U.S. high-risk mortgage market that could hurt the wider economy, also suffered losses against the high-yielding Australian and New Zealand dollars, with the Aussie approaching 18-year peaks after data showing a narrower than expected trade deficit.

Trade was expected to be relatively quiet however due to the U.S. Independence Day holiday.

Key central bank verdicts are due on Thursday from the UK and euro zone. Fifty-six of 70 economists polled by Reuters expect a Bank of England rate hike [BOE/INT] this week of 25 basis points to 5.75 percent after a two-day meeting, widening the gap over the Federal Reserve's 5.25 percent policy rate.

"The strength in sterling is primarily dollar weakness -- the dynamic seems to have moved away from high- versus low-yield to moves in the broad dollar against everything. So the fixation is whether the dollar continues to move lower," RBC senior currency strategist Adam Cole said.

"A UK rate hike is around 85 percent in the price of sterling. It will be a dynamic at the event however, so we would expect to see some price action either way," he added.

The ECB and its president, Jean-Claude Trichet, are seen reinforcing expectations for higher rates in the euro zone on Thursday, while keeping rates on hold for now at 4.0 percent.

A Reuters poll of 93 analysts this week showed 84 expect an ECB hike to 4.25 percent in September, with the median forecast for rates to peak at 4.5 percent by year-end. [ECB/INT]

By 0741 GMT, sterling was steady at $2.0179, having hit a 26-year peak above $2.02 earlier . The euro was steady at $1.3617, off a two-month peak of $1.3638, but still within sight of a record high set in April at $1.3682 .

The dollar was flat at 122.38 yen , holding in the 122-123 yen zone after pulling back from a 4-1/2-year high of 124.16 yen hit in June, according to Reuters data.

The euro was little changed at 166.68 yen after touching a record 167.19 on Tuesday.


The dollar has been under broad pressure since last week, weighed by worries about troubles in the U.S. subprime mortgage market that forced U.S. investment bank Bear Stearns to bail out an internal hedge fund suffering big losses last month.

Some traders said the dollar's fall may have gone too far, given this week's upbeat factory data and forecasts for the monthly jobs report on Friday to show solid employment growth, which would back up expectations for the Fed to hold rates steady.

"The dollar has been sold quite heavily ahead of the holiday, so we could see some short covering afterwards," said a trader at a Japanese bank.

The Australian dollar got a boost back towards an 18-year peak versus the U.S. dollar after data showing the country's trade deficit shrank in May to A$807 million, providing some hope of rising demand for its resource-heavy exports.

The Aussie rose 0.3 percent to $0.8573 after reaching an 18-year high of $0.8598 earlier in the week.

Earlier, Australia's central bank kept rates on hold at 6.25 percent as widely expected, but investors reckon solid growth well lead to higher rates in the months ahead.

The yen edged up after ratings agency Moody's said it may upgrade Japan's sovereign rating of A2, saying the country had reached an "inflection point" in the government's efforts to improve its massive debt.

But the yen's gains were fleeting as the Japanese currency remained dogged by its low 0.5 percent yield, the lowest among industrialised countries, and the Bank of Japan's repeated pledge to raise interest rates only gradually.

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