The dollar held near a nine-month high against sterling on Thursday on rising expectations that the Bank of England will cut interest rates later in the day amid growing concerns about Britain's economic outlook. The yen edged up from overnight lows against the dollar as Tokyo shares slid 1 percent and kept investors cautious of holding risky positions such as carry trades.
Sterling was knocked lower on Wednesday after Marks & Spencer, Britain's largest clothing retailer, reported unexpectedly weak fourth-quarter sales, stirring talk that weak consumption could lead to a sharp economic slowdown.
Investors see a roughly 60 percent chance the BoE will cut interest rates on Thursday, up from about a 30 percent chance priced in at the end of last week, amid concerns the United States will slide into recession, dragging down growth in both Britain and the euro zone. "The expectations for a BoE rate cut grew further after concerns for the UK's retail sector deepened overnight and the pound was hit," currency analysts at J.P. Morgan Chase Bank said.
"So if the BoE holds rates steady as we expect, the pound could rebound at least in the short term," they said in a research note to clients. J.P. Morgan sees the BoE leaving borrowing costs at 5.5 percent at the end of its two-day meeting later on Thursday, while it expects the European Central Bank to keep rates steady at 4.0 percent on Thursday, as do a majority in the market.
Sterling dipped slightly from late US trade to $1.9561 near a nine-month low of $1.9554 hit in the previous session. The pound was down 0.2 percent at 214.62 yen in sight of a five-month low of 213.45 yen hit on Friday.
The Australian dollar rose 0.1 percent against the dollar to $0.8830 helped in part by news that Australia's trade deficit narrowed more than expected in November. The Aussie was supported by growing expectations of a rise in Australian interest rates next month given the strength of domestic data, in contrast with mounting views for looser monetary policy in Britain and the United States.
The dollar slipped 0.1 percent against the yen to 109.72 yen stepping back from Wednesday's high of 110.13 yen on electronic trading platform EBS as traders trim positions in carry trades.
In carry trades, investors borrow low-yielding currencies like the yen to fund investment in higher-yielding assets. But such risky trades tend to be unwound when stock markets slump and market volatility rises. The Nikkei average shed 1 percent, tracking a broad retreat in Asian equity markets.
The euro edged up to $1.4680 above a one-week low of $1.4639 hit the previous day. Traders said the euro looked vulnerable in the near term as investors have started to focus on a potential slowdown in the eurozone after gloomy German industrial output and retail data.