Sterling hit a 4-1/2 month high against the dollar on Monday on expectations the Federal Reserve's new round of economic stimulus will continue to drive down the US currency. It was also higher against the euro, which ran out of steam after hitting its highest level against the pound in three months on Friday.
Investors are waiting to see if Spain will ask for aid to tackle its debt and analysts said Madrid appeared to be paving the way for such a request after it said it would set clear deadlines for structural reforms by month-end. Sterling was trading at $1.6257, having hit a peak of $1.6262, its strongest since late April. Data from the US Commodity Futures Trading Commission showed speculators turned negative on the dollar in the latest week to September 11, while they cut bets against the pound.
Traders and analysts saw the potential for sterling to gain further due to the Fed's new bout of quantitative easing, announced last week, which increases the supply of a currency and typically cheapens it. That potentially could take sterling towards this year's high of $1.6304. The dollar was also hurt by disappointing US data on Monday. "Cable (sterling/dollar) has been fairly well bid in the past few sessions and we expect that trend to continue, primarily because of the dollar's weakness. We see it rising to $1.63 in the near term," said Michael Derks, chief strategist at FXPro.
The euro fell against the pound on sustained selling by corporates and after peripheral bond yields rose. The euro was down 0.1 percent at 80.85 pence, pulling back from a three-month high of 81.14 struck on Friday. The common currency has broadly outperformed since the European Central Bank announced a bold plan earlier this month to lower borrowing costs for the bloc's most indebted countries, helping shore up sentiment towards euro zone assets. Some traders said the pound could regain some ground against the euro because recent data suggested the euro zone was still grappling with a sharp economic downturn, which could drive the ECB to lower rates in coming months.
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