Sterling was higher on Friday on jitters ahead of the upcoming G7 meeting, with investors weighing up the risk of the currency's weakness being discussed. It pared nearly half of its earlier gains, however, after Lloyds Banking Group announced large impairments related to its HBOS subsidiary, sending UK banking stocks tumbling.
The G7 meeting takes place in Rome on Friday and Saturday and investors are nervous that the subject of currency volatility could be raised, in particular the strength of the Japanese yen and the fall in the pound. "We have seen some short covering on the back of speculation that the pound weakness could be discussed at the G7 meeting," BTM-UFJ currency economist Lee Hardman said.
However, worries about the UK banking sector reared their head once more as Lloyds said HBOS made a pretax loss of 8.5 billion pounds in 2008, driven by 7 billion pounds in bad loans at its corporate division and another 4 billion in writedowns.
At 1547 GMT, the pound was up 1.2 percent on the day against the dollar at $1.4432. The euro traded down 1 percent at 89.26 pence, but this was comfortably above its session low of 88.33 pence. Against a basket of currencies, sterling rebounded to hit a high for the day of 78.5.
It had dropped as low as 76.60 on Thursday on the prospect that the Bank of England would cut interest rates further from their current 1.0 percent and consider unconventional measures to stimulate the economy. Speaking on Friday, Prime Minister Gordon Brown continued to suggest that the UK authorities were unconcerned about the pound's weakness, saying the decline in sterling's value has helped Britain's competitive trade position.
Sterling's gains on Friday wiped out some the losses suffered after BoE Governor Mervyn King said on Wednesday the central bank may soon implement unconventional measures to boost an ailing economy. Only last July, the pound was worth over $2, but since then it has lost a substantial chunk of its value, dropping to a 23-year low of around $1.35 last month. The euro also came close to parity against the UK currency at the end of last year.