Sterling slides on Dubai debt concerns

* Sterling falls broadly; euro at 1-mth high above 91 pence

* Pound loses more than 1 pct vs dlr, hits 6-wk low vs yen

* Analysts cite concerns on UK banks’ exposure to Dubai

* UK economic concerns weigh after Wednesday’s GDP data

By Jessica Mortimer

LONDON, Nov 26 (Reuters) - 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. [ID:nGEE5AO2L1]

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 EURGBP=D4. 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. [ID:nPAB008021]

On a trade-weighted basis =GBP the pound hit a one-month low of 79.8.

Sterling fell 1.3 percent against the dollar GBP=D4 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. He added, “There has been a lot of conjecture and rumour and it is unsubstantiated at this stage - we can’t say with any certainty that it will hit UK banks”.

European bank shares .SX7P fell around 5 percent on Thursday on concern about their potential exposure to Dubai debt problems. [ID:nWLA9194]. The fall was led by HSBC HSBA.L, Standard Chartered STAN.L, Barclays BARC.L, Deutsche Bank DBKGn.DE and Royal Bank of Scotland RBS.L.

HSBC, RBS and Lloyds Banking Group LLOY.L all declined to comment on their exposure to Dubai World. [ID:nGEE5AP0T2]

Against a broadly firmer Japanese yen GBPJPY=R, sterling fell more than 2 percent to hit a six-week low of 142.60


Traders said moves were exacerbated by thin trading due to the U.S. Thanksgiving holiday, while falls on equity markets encouraged selling of perceived riskier currencies, including sterling.

Lingering concerns that any UK economic recovery will be slow weighed on the pound meanwhile, after data on Wednesday showed the economy shrank by 0.3 percent in the third quarter [ID:nGEE5AO14R].

“The GDP data saw a modest upward revision, but that has not changed the bigger picture that the UK is lagging other countries such as the euro zone in terms of its recovery,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

For a graphic on comparative growth rates in the UK, euro zone and the U.S. click on: