Sterling stays at 3-1/2 years high

Sterling hit a fresh 3-1/2 peak against the euro on Wednesday as investors, concerned about the lack of progress on efforts to solve the euro zone debt crisis, continued to seek the safety of UK assets.
The euro fell to 78.71 pence, its weakest since November 2008 and some expected it to drop to 77 pence in the near term, saying the single currency is likely to stay under pressure after the European Central Bank cut the deposit rate to zero last week.
Against the dollar, analysts said the pound could rise further if US corporate earnings continue to disappoint. The pound was last up 0.3 percent at $1.5562.
The euro was last trading at 78.735, down 0.3 percent on the day. Traders cited selling of euros by corporates that saw the currency drop past a reported option barrier at 78.90 pence.
"The UK is a relatively safe place compared to Europe, and we're genuinely starting to see outflows from the eurozone and some of that is coming into the UK," said Geoff Kendrick, currency strategist at Nomura.
"We've cracked a key level at 79.50 pence, so we could go to 77 pence in the next couple of weeks."
Investors have stepped up sales of the euro in favour of safer-haven currencies and even higher-yielding currencies like the Australian dollar and the Swedish crown, as they are discouraged by the lack of progress towards solving the euro zone debt crisis.
Spanish bond yields eased on Wednesday as Madrid yielded to EU pressure and unveiled new measures designed to slash 65 billion euros from its deficit by 2014.
But overall the sentiment towards the euro remained bearish as political and legal hurdles on how to use the euro zone's rescue fund and the threat of contagion ensnaring larger economies in the currency bloc remained high.
The pound's latest gains against the euro pushed sterling's trade-weighted index to 84, the highest level seen since May 17, data from the Bank of England showed.
A sustained rise in the index could pose a challenge to British policymakers, who are trying to rebalance the UK economy by encouraging exports, analysts said.