Sterling pared gains versus the yen and dollar on Friday after comments from Federal Reserve Chairman Ben Bernanke led to a small increase in risk aversion and investors unwound carry trades. Bernanke said the Fed is set to act as needed to limit the impact of financial turmoil on the economy but will not bail out investors who made poor decisions.
US stocks cut gains and investors unwound some of the relatively risky carry trades where they borrow low yielding currencies like the yen to fund investments in higher yielding assets. This hit sterling which has the highest benchmark interest rate in the Group of Seven industrialised nations. "Investors were primed for a bit more from Bernanke and the fact he didn't give a bigger signal he would cut rates led investors to pull back from riskier trades," said Lee Ferridge, senior prop trader at Rabobank.
At 1418 GMT the pound was steady against the dollar at $2.0124. The euro was flat against the pound at 67.76 pence. Sterling earlier strengthened on UK GfK consumer confidence data that came in above expectations, hitting a two-week high versus the dollar.
Sterling had also benefited on early trading from reports that US President George W. Bush is to announce proposals to help subprime mortgage borrowers at risk of default. "The pound remains hostage to sentiment in the credit market," said Geraldine Concagh, economist at AIB Group Treasury in Dublin. "This was helped by reports that George Bush is going to help those with subprime mortgages which would support the real economy."
The Bank of England's interest rate decision will take centre stage next week. Economists expect it to leave interest rates on hold at 5.75 percent pending evidence on the extent to which financial turmoil is hurting the real economy. On Monday the manufacturing PMI for August is due, with analysts expecting it to show the sector cooling from the previous month.
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