Pound falls versus euro and dollar

08 Mar, 2007

Sterling fell against the euro on Wednesday, as investors mulled the prospect of further carry trade unwinding that could undermine the high-yielding pound. Growing risk aversion has led investors to decrease their positions in carry trades where they borrow low yielding currencies such as the yen to fund purchases of higher return assets.
The pound was hit hard as positions were unwound over the past week. Sterling/yen had been a popular carry trade, due to the yield differential between Japanese borrowing costs at 0.5 percent and British rates at 5.25 percent.
A Reuters poll released on Wednesday found that 33 strategists expect the carry trade unwind to continue while only 13 think it has run its course. "There is nervousness about buying the pound because investors are worried that there will be a shakeout in sterling/yen. There is nervousness that there is more (carry trade unwinding) to come," Rabobank senior proprietary trader Lee Ferridge said.
At 1455 GMT the pound was down 0.1 percent against the dollar at $1.9290. The euro was up 0.2 percent at 68.10 pence. It was down a third of a percent against the yen at 224.27 yen.
The Bank of England's Monetary Policy Committee began deliberations on Wednesday on whether to raise interest rates from their current 5.25 percent. Most forecasters polled by Reuters expect rates to be kept on hold in March with just nine out of 60 economists predicting a rate rise on Thursday.
Further out, analysts said there was a risk that the pound could weaken further on Friday, when key US labour market figures are released. "Tension is still high. If payrolls are disappointing it will show that the US economy is slowing, which will lead the dollar to fall and high yielding currencies will also underperform," said Paul Mackel, senior currency strategist at HSBC. "People will be very cautious on building long sterling positions before the payrolls numbers are out."

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