Sterling hits 3-1/2 year high against tumbling euro

Mon Jul 23, 2012 2:33pm IST

* Sterling at highest level vs euro since Oct. 2008

* Concerns about Spain, Greece fuel safe haven demand

* Pound struggles vs dollar, down 0.5 percent

By Michael Szabo

LONDON, July 23 (Reuters) - Sterling climbed to a more than 3-1/2 year high against a tumbling euro on Monday as worries over Spain and Greece's debt problems drove investors to the relatively safe haven of the UK currency.

Spain's borrowing costs jumped to euro-era highs after media reports that six more of the country's regions could follow in Valencia's footsteps and seek central government aid.

Investors were also increasingly worried about Greece's future in the euro zone, following a report in German magazine "Der Spiegel" that the International Monetary Fund may not take part in any additional financing for the country.

Greek Prime Minister Antonis Samaras said the country was in a 1930s-style "Great Depression", while German economy minister Philipp Roesler said he did not expect Greece to fulfill its requirements for a bailout.

International lenders will meet in Athens on Tuesday to discuss the terms of further rescue payments.

The euro slid against all major currencies, falling to 77.56 pence against the pound, the lowest level since October 2008.

Analysts said investor flows into safer havens including the dollar and the yen remained heavy, which in turn weighed on the pound against those two currencies.

The pound was last down 0.5 percent on the day at $1.5539 , its lowest level in a week, and hit a seven-week low of 121.29 yen.

Analysts said sterling could be subject to further weakness with the publication of preliminary second quarter UK GDP figures on Wednesday, forecast to show a 0.2 percent quarter-on-quarter slide and extending the country's recession into a third quarter.

"Market participants find that every piece of negative euro zone news gives yet another reason to sell the euro (even if already known), yet poor UK data is willfully ignored," said Commerzbank in a note to clients.

The bank's analysts highlighted data released last week including poorer-than-expected retail sales for June and public sector borrowing figures that were above expectations.

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