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Macroeconomic News

Dollar weakness lifts sterling from 3-year lows

Thu, 11th Jul 2013 09:40

* Sterling rises, but gains unlikely to last

* BoE pledge to keep rates low to pin down sterling

* Yield gap between U.S. Treasuries and gilts narrows

LONDON, July 11 (Reuters) - Sterling pulled away from three-year lows against the dollar on Thursday with the greenback under pressure after the Federal Reserve chief's comments injected doubts over when monetary stimulus will be withdrawn.

Yields on U.S. Treasuries fell after Ben Bernanke's comments and spreads over UK gilts narrowed, offering a reprieve to the British pound which has lost over 7 percent against the dollar so far this year.

Sterling had fallen to a three-year low of $1.4814 on Tuesday, highlighting the monetary policy divergence between the Bank of England and the Fed. While the BoE has pledged to keep rates low to boost a nascent economic recovery, the Fed in late May signalled it was ready to slow its asset purchase programme, perhaps as early as later this year.

But Bernanke on Wednesday said the U.S. central bank would continue to pursue an accommodative monetary policy as inflation remained low and the unemployment rate might be understating the weakness of the labour market.

Before his comments, the minutes of the last Fed meeting also suggested that many board members wanted further improvement in the U.S. labour market before the pace of asset purchases could be slowed.

All of which left the dollar index sharply lower and boosting currencies like sterling. The pound was up 0.3 percent at $1.5090 while it was flat against the euro. The euro was at 86.45, off a four-month high of 86.945 pence struck earlier in the session.

"We think any rise in sterling/dollar is a sell. The dollar's long term uptrend remains intact," said Alvin Tan, currency strategist at Societe Generale. "In the short term, any gains to $1.52/53 should be sold into and we retain our year end forecast at $1.43."

Investors, particularly hedge funds, were also looking to sell sterling against the euro on expectations the BoE would be far more aggressive in easing monetary policy in coming months than the European Central Bank.

The euro was likely to remain weak against the dollar as the ECB has indicated monetary policy will stay accommodative as it grapples with a recession in the euro zone. But since the euro is Britain's largest trading partner, a recession there will prompt BoE policymakers to keep policy accommodative and the pound weaker to help exports.

As such, many expect the euro to outperform the pound.

"Yesterday's pullback managed to hold above the 85.80 area and keeps the higher lows, higher highs scenario intact. We need to make new highs beyond 86.70 to keep the recent grind higher going towards 87.30," CMC Markets said in a daily note.

(Reporting by Anirban Nag/editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

(c) Copyright Thomson Reuters 2013. Click For Restrictions -

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