Sterling falls

Sterling fell against the dollar on Tuesday, erasing early gains as UK stock reversed course to fall to multi-year lows, prompting investors to seek the perceived safety of US dollar assets. The pound hit its lowest level in just over a month against the dollar on Monday after share prices tanked as HSBC unveiled a 12.5 billion pound rights issue as annual profits fell and bad loans soared in the United States.
Concerns about the ailing banking system in the wake of HSBC put further pressure on Britain's top share index, which was down 2.1 percent by late afternoon trade, after tumbling 5.3 percent the previous day. "Risk aversion will be the state of play as equity markets continue their adjustment," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
By 1437 GMT, sterling was flat on the day at $1.4043, after hitting an intraday high of $1.4158. It fell as low as $1.3958 on Monday, the lowest since January 27. The pound gained sharply against a broadly lower yen, up 0.8 percent at 138.25 yen.
A surprise decision by Australia's central bank to keep rates on hold on Tuesday also buoyed those currencies perceived to be higher-risk assets, including sterling, but the bounce proved short-lived. Weak economic data and expectations for further monetary easing later this week kept pressure on the pound. UK finance minister Alistair Darling said in a Daily Telegraph interview on Tuesday the Bank of England could this week start buying assets with newly created money to boost the money supply and the economy.
The BoE is expected to cut borrowing costs from the current record low of one percent and also start the first tranche of so-called quantitative easing. An exchange of letters between Darling and BoE Governor Mervyn King is expected in the next few days setting out the parameters for any quantitative easing programme.
The European Central Bank will also hold a rate-setting meeting on Thursday, where it is widely expected to cut rates by 50 basis points to 1.5 percent. The euro was up 0.2 percent at 89.71 pence. Data on Tuesday showed UK construction activity shrank at a record pace in February, with the Chartered Institute of Purchasing and Supply/Markit construction PMI index falling to 27.8 from 34.5 in January.