Sterling and the euro edged higher on Wednesday, recovering from earlier losses on a slight thaw in risk aversion. But market concern persisted over losses in the UK banking sector and a deepening recession in the euro zone, firmly limiting the rebound by the pound and the euro. Sterling and the euro were buoyed by short-covering as stocks in Asia came off earlier lows and as US stock futures rose on Wednesday.
Tokyo's Nikkei stock average fell 2 percent on the day to 7,901, off the intraday low of 7,829. Market participants, however, saw little reason to predict that the worst was over for the pound and the euro. "These currencies did not have too many concrete reasons to rebound, perhaps apart from the fact that stocks in the region did not fall as steeply as anticipated after the tumble in US stocks the previous day," said Shuichi Kanehira, a senior trader at Mizuho Corporate Bank.
"The longer term trend still points towards major currencies being sold against the yen, with the trend only temporarily offset by occasional bounces in equities," Kanehira said. Earlier on Wednesday, the pound hit a 7-1/2 year low against the greenback and a record low versus the yen. The euro retreated to a six-week trough against the dollar and hit a three-month low versus the Japanese currency.
Pressure on sterling mounted after the Royal Bank of Scotland on Monday announced the biggest losses in UK corporate history, stoking worries over the country's banking sector and the economy. The euro has been hurt lately by sovereign debt rating downgrades to euro zone member nations and deteriorating economic prospects, which analysts say could hasten monetary easing by the European Central Bank.
A European Commission report on Monday forecast the euro zone economy would shrink 1.9 percent in 2009. Market players awaited remarks by European Central Bank President Jean-Claude Trichet later on Wednesday for hints about monetary policy steps at the ECB's next meeting in February.
Traders said other factors that could have an impact on currencies include UK labour market data and the Bank of England's minutes of its January 7-9 monetary policy committee meeting. Both are due later on Wednesday. Sterling gained 0.2 percent from late US trade the previous day to $1.3875 after falling to $1.3815, its lowest since mid-2001.
The British unit was at 124.65 yen, down 0.2 percent after sinking to a record low of 123.95 yen. The euro climbed 0.3 percent to $1.2945 after earlier hitting a six-week low of $1.2845 on trading platform EBS. The euro rose 0.3 percent to 116.15 yen, rebounding from a three-month low of 115.30 yen.