Sterling recovered some ground against the dollar and euro on Monday, initially buoyed by a slight return of risk appetite, after hitting a fresh 4-1/2 year low against the common currency on Friday. The pound had been hurt last week by fears of slowing UK economic growth and expectations of interest rate cuts from the current 5.75 percent.
"What we've seen is a general recovery and a buying opportunity from Friday's illiquidity-fuelled sell-off," said Neil Mellor, currency strategist at Bank of New York Mellon.
"It's our view that any rise in the dollar would be seen as a selling opportunity, whether against the euro or sterling - because the dollar's going down in the longer term. All roads point south."
Earlier in the session sterling - and other high-yielding currencies - had enjoyed a boost from firmer equity markets and renewed interest in the carry trade, where investors borrow low-yielding assets to fund purchases of higher yielding ones. But equity markets later gave up some gains, with the opening rally fizzling out in Europe after investment bank Goldman Sachs downgraded its recommendation on HSBC.
At 1458 GMT the pound was up 0.33 percent versus the dollar at $2.0671. The euro was down 0.25 percent on the day at 71.80 pence, still not far from its 72.16 pence peak set on Friday, the highest since June 2003. "You'll see sterling going higher against the dollar but frankly if you're looking at a league table, it's the euro at the top, sterling second and the dollar third," said Bank of New York Mellon's Mellor. "There's far more chance of interest rates going lower in the UK next year than there is in the eurozone ... And all the news we've seen recently about sterling and the UK economy has definitely been in the bearish camp."