Tokyo: Sterling hit a record low against the euro on Monday, hurt by its yield disadvantage against the single European currency and inching closer to parity.
The bleak outlook for the UK economy and expectations that euro zone interest rates are likely to stay higher than British rates in coming months, pushed sterling to a low of 96.315pence on the Reuters dealing system.
“The trend of weakness in sterling is likely to continue for a while longer,” said an analyst for a Japanese foreign exchange broker.
Sterling’s fall against the euro gained momentum after some stop-loss sales at levels near 96pence were triggered, said a trader for a European bank. If it hits parity against the euro, that would be the first time since the single European currency’s launch in 1999.
A trader at another European bank cited hedge fund buying of euros against sterling, as well as buying of euros versus the dollar by Middle Eastern players.
Sterling later trimmed some losses against the euro and stood at 96.29pence, down 0.1% from late US trading on Friday.
Amid thin year-end trade, the euro rose 0.6% against the dollar to $1.4140.
Some market participants also noted that there was caution about potential speculative moves in light trade.
“You need to be careful, or you could end up falling into a hole,” said an analyst for a Japanese foreign exchange broker.
The dollar fell broadly, especially against the Swiss franc, which rose on safe-haven buying after Israel launched air strikes on the Gaza Strip for a second straight day on Sunday, traders said.
“There are geopolitical risks, and the Swiss franc is being bought because of that, as is the theory in such cases,” said a trader for a European bank.
The dollar declined 0.9% against the Swiss franc to 1.0576francs.
It dipped 0.1% against the yen to 90.56yen and also retreated versus sterling, falling 0.3% to $1.4690.
The trader for a Japanese bank said the dollar’s fall may be a sign of things to come in 2009.
“There is the vague sense that the broad trend is toward dollar weakness,” the trader said, adding that lingering uncertainty about the fate of US “Big Three” automakers and the health of the U.S. financial sector could work against the dollar.
The dollar index, which measures the dollar’s value against a basket of major currencies, has risen 5% for the year. But it has fallen 6.9% in December, the steepest monthly fall since its 7% drop in March 1985.
The dollar fell earlier this month, partly because of market expectations for aggressive monetary easing by the US Federal Reserve. Such expectations were borne out by the Fed’s decision in mid-December to slash interest rates to a range of zero to 0.25%.