Sterling fell to an eight-and-a-half month low against the dollar on Friday as concerns over eurozone sovereign debt problems boosted the appeal of the greenback as a safe-haven currency. Worries about debt problems in the eurozone have extended beyond Greece to Portugal and Spain, hitting riskier assets, with sterling falling in tandem with the euro against the dollar.
Concern over Britain's public finances, and political uncertainty ahead of a general election due by June also weighed on sterling sentiment. "The eurozone debt story is the main focus. The euro is looking weak and sterling is following," said Audrey Childe-Freeman, currency strategist at Brown Brothers Harriman.
"But there is nothing good on the UK domestic scene either. The economy is still very sluggish, the political uncertainty will leave sterling vulnerable in the run-up to the election and the BoE is nowhere near even contemplating exiting QE," she added. Traders said position adjustment ahead of the weekend accelerated selling of the pound, which has lost close to 2 percent against the dollar this week, its biggest weekly fall since late September 2009.
At 1601 GMT, sterling was down 0.7 percent against the dollar at $1.5641, having hit a low of $1.5605, its weakest since mid-May 2009. "Sterling, like many other currencies, has come under pressure against the dollar. There has been a general surge in the dollar due to a spike in risk aversion which has weighed on equities and commodities," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.
Markets were also wary ahead of a meeting of Group of Seven finance ministers in Canada at the weekend. The pound fell against the euro, with the single currency trading up 0.2 percent at 87.37 pence, while sterling's trade-weighted index fell to 80.3, its weakest in three weeks.
Earlier on Friday, producer prices data showed further upward pressure on UK inflation, with British manufacturers' raw material costs up more than expected last month and RISING at their sharpest annnual rate since October 2008. The pound saw only very brief gains from the Bank of England's expected decision on Thursday to pause quantitative easing after 11 months of asset-buying totalling 200 billion pounds, leaving the door open to more if needed.
"The BoE was a bit of a non-event for sterling, particularly as the statement confirms that UK monetary conditions will stay loose for some time, which gives a further excuse for sterling bears," Brown Brothers' Childe-Freeman said.