Sterling trimmed gains in late European trade as the dollar benefited from a rebound in US stocks triggered by coordinated central bank action to help beleaguered money markets. The US Federal Reserve said it would expand its reciprocal currency agreements to $180 billion, boosting its existing swap lines with the European Central Bank and Swiss National Bank and setting up new currency swap arrangements with the Bank of Japan, Bank of England and Bank of Canada.
US stocks rose after their action, which was aimed at easing money market tensions seen after the collapse of Lehman Brothers and the bailout of US insurer AIG earlier this week. The pound had risen earlier in the day after British bank Lloyds TSB sealed a 12.2 billion pound ($21.7 billion) deal to buy troubled HBOS plc and economic data showed a surprising jump in UK August retail sales.
"The HBOS deal provides a temporary reprieve, and we may see a move up to $1.84 in the medium term," said Ian Stannard, senior foreign exchange strategist at BNP Paribas. At 1358 GMT, the pound was up 0.3 percent at $1.8194, after hitting a session high of $1.8276. It also recovered somewhat against the euro, trading at 79.08 pence from a low of 79.62.
Some analysts also attributed the pound's recent strength to fund repatriation. "When we see some sharp fluctuations in equity markets, there is some repatriation by UK funds," said Chris Turner, head of FX strategy at ING. "Some of the sterling gains in the past week may have been repatriation." However, the pound's upside is expected to be capped by expectations the Bank of England will soon be forced to cut interest rates to help the flagging economy.
Separate data on Thursday showed gross UK mortgage lending fell 12 percent in August and 36 percent on the year, while Britain's public sector net borrowing last month rose to 10.4 billion pounds, the highest for a month of August since 1993.
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