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FOREX-Dollar climb knocks pound to 7-1/2-yr low, euro weaker

By Naomi Tajitsu

LONDON, Jan 21 (Reuters) - Sterling tumbled on Wednesday, hitting a 7-1/2-year low against the dollar, as intensified risk aversion drove investors back into the U.S. currency which reached its strongest levels against the euro in six weeks.

The pound extended deep losses on the view that an ailing UK financial sector will keep the economy weak despite bank bailouts, fiscal stimulus and drastic interest rate cuts. A surge in UK joblessness also kept sterling weak.

Economic worries around the world stung global stock markets and sliding European shares kept pressure high to dump risky assets, boosting the dollar and the yen.

"There's a lot of jitters in the financial markets, and it's taking its toll on currencies which have stressed capital financing needs and which are particularly exposed to financial sector weakness," said Phyllis Papadavid, currency strategist at Societe Generale in London.

She added that this had put sterling in the firing line, and that the euro would also continue to suffer.

Sterling was hit as UK banking shares took a beating on the view that the British financial sector continues to deteriorate despite the government's latest bank rescue plan, putting the broader economy in deep trouble.

Bank of England Governor Mervyn King said on Tuesday that the UK economy will likely shrink significantly in the first half of the year, and that policymakers need to consider using more than just interest rates to stimulate demand. [ID:nLK713961]

Economic worries were not confined to the UK, however. European shares .FTEU3 fell 1.7 percent and edged towards their lowest in nearly six years, reminding investors that the global economy is continuing to suffer despite dramatic rate cuts and fiscal stimulus plans by authorities around the world.

Sterling fell more than 1 percent to $1.3715, its weakest since mid-2001. The pair has fallen more than 7 percent so far this week, its biggest weekly slide since late October.

Sterling dropped across the board, hitting a record low of 123.01 yen against the low-yielding Japanese yen, which tends to rally during periods of risk aversion.

The euro rose more than 1 percent to 94.10 pence, its strongest since the start of the month and inched closer to a record high around 98 pence hit last month.

Despite the euro's gains against sterling, the single currency fell to $1.2845 on electronic trading platform EBS, its lowest level since Dec. 9.

This boosted the dollar across the board, pushing the U.S. currency .DXY as high as 86.504 against a basket of currencies, its highest level since early December.

Against the yen, the dollar was little changed at 89.90 yen.

"It's still a positive environment for the dollar, with equities down. The dollar and the yen are still strong in this risk-averse environment," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.

"With other central banks cutting rates down to the level of the U.S. and Japanese central banks, there's still more downside for currencies like sterling and the euro."

UK DATA, BOE MINUTES

Keeping sterling out of favour were figures on Wednesday showing that the UK claimant count jumped by 77,900, the 11th straight month of rises, while a broad measure of unemployment rose to 6.1 percent from 6.0 percent, its highest since the three months to April 1999. [ID:nONS004013]

Minutes from the BoE's monetary policy meeting earlier this month showed that one member voted to cut rates by 100 basis points, before the central bank ultimately decided to cut by 50 basis points to 1.5 percent. [ID:nLL446707]

The UK currency's latest pummelling was sparked after the Royal Bank of Scotland announced massive losses on Monday, which reinforced investor worries about the UK's hobbling financial sector.

The euro has been hurt lately by sovereign debt rating downgrades to euro zone member nations including Spain, and deteriorating economic prospects, which analysts say could hasten monetary easing by the European Central Bank.

Speaking before a committee of the European Parliament, ECB President Jean-Claude Trichet on Wednesday played down the threat of deflation, while rebuffing rumours that some euro zone member would leave the union given the financial crisis. [ID:nLL367087]

He added that all global currencies were under pressure.

(Editing by Stephen Nisbet)

FOREX-Dollar gains, pound suffers on UK bank woes

* Pound tumbles 3.5 pct vs dollar to 7-1/2 yr low

* Euro drops to 6-week low vs dollar, dlr index at 6-wk high

* Stronger-than-expected German ZEW fails to lift euro

* UK banking woes weigh on pound; euro hit by grim outlook

(Changes byline, adds quotes, updates prices)

By Naomi Tajitsu

LONDON, Jan 20 (Reuters) - The dollar climbed broadly on Tuesday, boosted by sterling's tumble to a 7-1/2 year low on UK banking sector concerns, while the view that the euro zone will suffer a deep recession pushed the euro to a six-week low.

The dollar hit its strongest level against a currency basket since early December, with market participants also saying that euphoria ahead of Barack Obama's inauguration as U.S. president had increased short-term demand for the U.S. currency

AceTrader: Market Moving News

Gbp/usd - 1.3820 ... Investors are now expecting the Bank of England will probably soon start buying 'a rather wide range of financial assets' in an effort to increase money supply and boost the economy. The British pound rebounded fm 1.3721 on short-covering, however, selling interest is likely to emerge at 1.3840, 1.3860/65 n 1.3900. On the downside, stops are reported below 1.3715/20 but some demand is seen abv major support at 1.3682 (2001 low).

USD Surges vs GBP

The dollar surged sharply against the sterling and the euro, rallying to its highest level since June 2001 versus the pound at 1.3860 and to 1.2855 against the euro. The key highlight of the US session was the inauguration of President Obama, which had little impact on the currency market.

Rand Benefits from Carry Trade

Yesterday, the Forex Blog reported that the Yen could soon peak as a result of renewed interest in the carry trade. On the other side of this equation are emerging market currencies, most of which offer interest rates well above their industrialized counterparts. The spread between South Africa's benchmark interest rate and the rates of Switzerland, Japan, and the US, now exceeds 10%. As a result of near-zero rates in these countries, investors have once again taken to scouring the earth for yield. Apparently, government stimulus plans and monetary incentives have restored confidence in risk-taking. South Africa is especially poised to benefit, as it is one of the world's largest producers of gold, which recently resumed its upward trend. Bloomberg News reports:

“South African interest rates are very high relative to other markets and that yield differential is underpinning the rand at a time when trading is very thin.”

Consensus: Fed is Devaluing Dollar

The Fed is officially in panic mode, having lowered its benchmark federal funds rate close to zero and exhausted all of the tools in its monetary arsenal, with one notable exception: its printing press. In other words, the Fed is trying to jumpstart credit markets by acting as a market participant- investing funds to compensate for the reticence of private investors. Capital markets are naturally enthusiastic about this policy, since some of the new cash will probably be used to make leveraged bets on asset prices and erase some of the losses of the last year. Forex markets are palpably less excited that the Fed has essentially eroded much of the impetus for foreigners to hold their ash in the US, with paltry short-term yields and long-term gains that will likely be offset by inflation. Unless foreign Central Banks follow suit

and eliminate the current interest rate disparity with the US, it could be a bumpy 2009 for the Dollar. Forbes reports:

Citi Analyst Steven Wieting opined: "If you want yield, you'll have to take some risk." With borrowing rates suddenly close to zero and the Fed saying it will keep them at “exceptionally low levels ... for some time, you'll get as little of it from government-issued debt as possible."