Sterling hits 2-1/2-month low against euro

Sterling hit a 2-1/2-month low against the euro on Wednesday after the yield on two-year UK government bonds fell to a record low, making short-dated British debt less attractive than its eurozone counterpart. Lower short-term UK yields hurt the pound across the board, pushing it to a six-week low against the dollar, while a strong reading of German Ifo business sentiment boosted the euro against sterling.
The two-year gilt yield hovered near the all-time low of 0.816 percent hit on Tuesday, reflecting the view that UK interest rates will stay at a record low 0.5 percent for a while to help revive the economy. "When the BoE is so cautious about keeping rates low and the Ifo is so positive, it's hard not to push euro/sterling higher," said Geoffrey Yu, currency strategist at UBS in London.
The faster fall in the UK yield over the two-year Schatz kept the spread a few basis points away from its widest since the start of the year, which tarnished the relative appeal of UK assets over those in the eurozone. The euro rallied more than 0.5 percent to 88.075 pence, its highest since early June and poking through key 88.00 pence level, before pulling back to 87.875 percent by 1407 GMT.
The euro extended gains in summer holiday-thinned trade after the Ifo think tank's German business climate index rose to 90.5 in August from an upwardly revised 87.4 in July. Economists had forecast a reading of 88.9. The two-year gilt yield was at 0.880 percent on Wednesday, well below 1.30 percent for the two-year Schatz.
This put the gilt/Schatz spread at around 42 basis points, according to Reuters charts, after widening to around 51 basis points earlier in the day. Sterling slipped more than 1 percent on the day to $1.6160, its lowest since mid-July, as the dollar rose broadly after a fall in stocks and oil prices triggered some risk aversion and prompted traders to dump more sterling positions. The pound was under broad selling pressure on Wednesday, hitting its weakest level against the Australian dollar since 1996.
Sterling also struggled against the yen, sliding to a one-month low around 153.00 yen, its lowest in a month. The March 2010 short sterling/Euribor spread moved in favour of the euro on Wednesday to its widest in six months. The equivalent UK/US spread tightened to its narrowest in two weeks to 27 basis points in favour of sterling.