Sterling fell on Thursday, hitting its weakest in a month against the euro and a basket of currencies, on worries about British banks' potential exposure to debt problems in Dubai. Dubai's shock move on Wednesday to restructure Dubai World, and delay repayment on some of the company's $59 billion of liabilities, sent ripples through financial markets, denting equities and riskier currencies.
Some traders and analysts said sterling was underperforming because of concerns that some UK banks may be affected, although no exposure was confirmed. "There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure," said Ian Stannard, currency strategist at BNP Paribas. The pound is particularly sensitive to any banking sector problems, given the fact that the financial sector makes a large contribution to the UK economy.
"When you have obvious signs of financial stress sterling tends to take the strain in currency markets, and euro/sterling in particular, which is what we have seen today," said Adam Cole, global head of FX strategy at RBC Capital Markets. At 1605 GMT, the euro was up 0.4 percent at 90.90 pence. Earlier, the single currency broke above 91 pence for the first time in a month to hit a high of 91.29 pence.
The euro came off highs, however, after French Economy Minister Christine Lagarde said the level of the euro against other currencies was hurting European exporters. On a trade-weighted basis the pound hit a one-month low of 79.8. Sterling fell 1.3 percent against the dollar to $1.6495, just shy of a session low $1.6475. Gavin Friend, currency strategist at nabCapital said sterling had been "disproportionately hit" by the shock debt request from Dubai.