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Dollar surge, political nerves send sterling to 3-month low

Wed, 11th Jan 2017 17:57

* GBP heading for fourth week of falls vs euro

* Brexit, trade data, N. Ireland fracturing all weigh

* Graphic: sterling and gilt yields

* Graphic: World FX rates in 2016

By Marc Jones and Jemima Kelly

LONDON, Jan 11 (Reuters) - Sterling hit a three-month low against the dollar on Wednesday, as a renewed surge by the U.S. currency compounded a lengthening list of political strains weighing on the pound.

As well as fears of a messy divorce from the European Union, the threat of Scotland breaking away has re-emerged for the pound this week as well as a collapse of Northern Ireland's decade-long power-sharing government.

Sterling spent the day in the red after lacklustre trade data, but its slide steepened to almost 1 percent around mid-afternoon as a news conference by U.S. President-elect Donald Trump lifted the dollar against the main world currencies.

It drove the pound as low as $1.2045, a level last seen during a flash crash in October, though it was soon on the recovery path and steadied at $1.2130 - a more modest 0.3 percent lower - as London trading wound down.

"We are still left with the impression that the real economy has yet to be hit by Brexit. It is the politics rather than the economics hitting the pound," said Rabobank strategist Jane Foley.

The earlier data had shown Britain's trade performance deteriorated at the end of last year, as a record value of goods imports outweighed record exports, showing the pound's drop since June's Brexit vote is yet to reset the balance.

Sterling has fallen almost 20 percent against the dollar in that time and is on course for its fifth week of falls in the last six. Against the euro it has lost 12 percent since June and is heading for its fourth straight weekly drop.

It hovered little changed at 86.50 pence by 1715 GMT.

That came after Prime Minister Theresa May sidestepped questions on Brexit during weekly jousting in parliament. Attention had also briefly focused on Northern Ireland which is highly likely to hold fresh elections after a devolved government crumbled.

It raises the prospect of a lengthy renegotiation between Northern Ireland's two divided governing partners on the terms of power-sharing, part of the 1998 Good Friday peace agreement, as well as further complicating the Brexit debate.

Rabobank's Foley said her clients were not yet raising worries about the impact on sterling of the fracturing in Belfast. Instead all the focus is on the path to Brexit.

UBS Wealth Management currency strategist Geoffrey Yu added: "Fresh shorts are being put on - this is kind of a repeat of what happened around the (ruling Conservative) party conference in October, with the market pricing in a harder Brexit." (Additional reporting by Patrick Graham; Editing by Adrian Croft)

Next Article: UK banks' share of corporate currency business dips

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