Sterling hit an almost two-week high against the euro on Tuesday, as the single currency fell prey to strong US data and investors pricing in the spread of the housing and banking sector crisis in mainland Europe. Dealers also noted hefty selling of euros at the European Central Bank's latest fixing, exacerbated by automatic sell orders at key technical support levels.
Britain's own struggle with the financial sector crisis and a stagnant economy were reflected clearly in the pound's performance against the dollar, as the US unit rose strongly. "It looks like this (euro/sterling) move is more a function of euro/dollar weakness. Cable (sterling/dollar) has moved lower but has lagged the euro's falls," CBA currency strategist Divyang Shah said.
Data on business activity in the US Midwest also boosted the dollar, expanding in September at a faster rate than expected, with production picking up rapidly and hiring rates on the rise, a report showed on Tuesday. By 1507 GMT, the euro had fallen 1.2 percent to 78.82 pence, having earlier plumbed an 11-day low of 78.45 pence. Traders cited selling of euros at the ECB's latest fixing and sell orders triggered at the 79.00 pence mark. "I am sure a number of technical accounts had some sell signals once we broke 79.00 pence," one analyst said.
The pound dropped 1.4 percent against the dollar to $1.7801 after reaching a two-week low of $1.7761 and following its biggest one-day percentage fall in over a decade on Monday. Analysts say Britain is just as exposed as the United States as markets eye every twist and turn of the proposed $700 billion US rescue plan for the financial industry.
US President George W. Bush gave assurances earlier that the bailout plan was not dead as bank rescues spread in Europe. The crisis came home to roost in Britain on Monday as the UK government said lender Bradford & Bingley's branch network would be sold to Spanish bank Santander and the remainder of the group would be nationalised.
"From a European perspective there are major concerns that the crisis is not just a US story," Brown Brothers Harriman FX strategist Audrey Childe-Freeman said. "We've had to see partial nationalisation of some European banks and there's a general feeling that there's a lot worse to come in Europe and the UK."
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