Sterling buckled against the dollar and the euro on Monday as escalating worries that the global economy will be mired in recession this year raised risk aversion, putting the UK currency under selling pressure. Data last week showing a drastic loss in US jobs in December reminded investors of the economic difficulties to be faced in 2009, evaporating risk demand and prompting traders to book profits after the pound's rally last week.
Demand to shun risky assets led to a 2 percent tumble in sterling versus the dollar and the yen, while the euro rallied around the same amount against the UK currency. The pound fell alongside high-yielding currencies like the Australian and New Zealand dollars, which are often considered barometers for risk demand. The selling came after those currencies had started 2009 on a "Buy" note due to slightly lower risk aversion earlier in the month.
"We're seeing quite a powerful reversal in the euro correction which came at the end of last week," said Robert Minikin, senior currency strategist at Standard Chartered in London. "We see more weakness to come for sterling, specifically against the euro."
Underlining weakness in the UK, the National Institute of Economic and Social Research estimated at the weekend that UK economic output fell 1.5 percent in October-December, its fastest contraction since 1980. By 1459 GMT, sterling had fallen 2 percent to a session low of $1.4862, according to Reuters data.
The dollar extended gains, after climbing against the pound on Friday after US non-farm payrolls, while dismal, fell less than expected. The euro rose around 1.9 percent to a session high of 90.24 pence, pulling away from a four-week low of 88.38 pence hit on Friday. The euro recovered after posting its biggest weekly percentage loss on record last week.
Some traders said demand for euros was contributing to broad sterling losses, adding that central banks picked up the single currency for reserve diversification purposes. Against the yen, the pound fell 2.4 percent to 133.32 yen, edging closer to 129.82 yen hit on Reuters data late last month, its weakest level since 1995.
Sterling sharply reversed gains made last week, when it rallied roughly 4 percent against the dollar and pushed the euro down 7 percent on a weekly basis as traders closed short positions in the UK currency which had driven the single European currency to a record high near parity last month.
Some market participants said that sterling's short-covering rally had played itself out, adding that the currency would resume its broad, downward trend, albeit at a slower pace. Analysts said that traders had largely brushed off Monday's NIESR report, as they had with grim UK manufacturing output figures late last week, arguing that much of the country's economic weakness is priced into the pound's value. Despite sterling's slide on Monday, some in the market said that the UK currency still had some room to gain despite ongoing weakness in the UK economy, due to lingering short positions in the currency taken on during its battering in late 2008.
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