Sterling fell against the dollar, yen and euro on Friday as risk aversion hurt higher-yielding currencies, prompting investors to cut risky carry trades. Turbulence in global equities and credit markets has prompted investors to shun borrowing low-yielding units like the yen to fund purchases of higher-return assets including the pound.
Which has the highest interest rates in the G7 at 5.75 percent. Credit market jitters caused US and eurozone short-term money market borrowing rates to spike higher, prompting the European Central Bank and US Federal Reserve to inject liquidity into the system for a second day in a row.
British sterling deposit rates for tomorrow/next day delivery jumped to 6.5 percent, 75 basis points above the BoE's base rate. "There's only one game in town and it's credit markets... as credit concerns raise their head, the ECB and Fed try to stem the flight-to-quality by injecting capital and that's seeing cash taken out of risk assets," Geoff Kendrick, currency strategist at Westpac said.
"That's the carry trade in FX land so...sterling is down," he added. By 1427 GMT, the pound was down 0.4 percent on the day at 237.99 yen, and 0.2 percent lower at $2.0189. Sterling was also down 0.2 percent versus the euro at 67.71 pence. British inflation data for July is due out next week, but analysts said the impact of those figures may take a back seat due to current volatile conditions.
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