Sterling slides to 2-1/2 year low after Fed, BoE minutes

Thu Feb 21, 2013 4:08am EST

Related Topics

* Sterling near 2-1/2 year low versus dollar

* FOMC hints at pullback in bond buying, contrasts with BoE

* Public sector borrowing data at 0930 GMT

By Anooja Debnath

LONDON, Feb 21 (Reuters) - Sterling fell to a fresh two-and-a-half year low against the dollar on Thursday and was likely to remain vulnerable after Bank of England minutes showed policymakers edging closer towards looser monetary policy.

BoE minutes contrasted with U.S. Federal Reserve's policy minutes showing some policymakers thought the pace of bond-buying should be stopped or reduced.

Sterling slid as low as $1.5130 on Thursday, its lowest since July 2010, before recovering some of its losses to last trade down 0.3 percent on the day at $1.5195.

Traders said a U.S. macro hedge fund was cited as the main buyer of sterling/dollar this morning, helping to lift it off its lows.

"The intensity of the sterling move lower in the last 24 hours has been a toxic mix of the BoE voting to do a little bit more quantitative easing and the Fed saying they might end their (bond purchases)," said Kathleen Brooks, research director at Forex.com.

"The Fed minutes suggested that their balance sheet could shrink faster than the BoE's."

Brooks said if sterling broke below $1.50, it could easily slide towards $1.45. Against a trade-weighted basket of currencies the pound matched the 17-month low of 78.7 hit on Wednesday.

The pound recovered some of its losses against the euro, however as weak German and French data weighed on the single currency.

The euro was down 0.3 percent on the day at 87.00 pence, having hit a near 16-month high of 87.645 pence on Wednesday.

Minutes from the BoE's latest policy meeting showed outgoing Governor Mervyn King and two others voted to relaunch asset purchases under its quantitative easing (QE) programme. The vote against extending QE was 6-3, closer than the forecast for an 8-1 split.

Policymakers also considered expanding the range of assets they purchased under QE -- typically negative for a currency because pumping more money into the economy increases the supply -- and cutting interest rates.

"The dovish BoE MPC minutes took sterling/dollar sharply lower yesterday but the pace of (the move) down has somewhat surprised us, the Fed minutes took sterling/dollar lower breaking through key resistance levels and has found a base around 1.5150 for now," analysts at Lloyds Bank said in a note.

The BoE also indicated it is prepared to allow inflation to remain above its 2 percent target beyond the two-year horizon outlined in its mandate.

The British currency's outlook has been bleak due to fears of a downgrade of the UK's triple-A credit rating and deteriorating economic conditions.

Public sector borrowing figures for January due at 0930 GMT. A worse-than-expected figure may increase concerns about the UK's debt problems and weigh on the pound, although analysts did not expect a significant impact. (Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)

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