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Sterling drops to 4-month low vs dollar on Spain worries
May 30, 2012 / 2:02 PM / in 5 years

Sterling drops to 4-month low vs dollar on Spain worries

(updates prices, adds quote)

* Sterling hits 4-month low vs dollar as Spain worries grow

* Pound expected to remain firm versus ailing euro

* UK data beats expectations, no QE seen next week

By Jessica Mortimer

LONDON, May 30 (Reuters) - Sterling fell to a four-month low against the dollar on Wednesday as worries about Spain’s banking sector problems and its rising borrowing costs pushed investors into the safety of the U.S. currency.

The pound lost 0.5 percent on the day to $1.5565, breaking below a reported options barrier at $1.5600 to mark its lowest since late January.

However, the pound was expected to remain well supported against the euro as investors seek alternatives to the troubled common currency.

“Sterling is holding up better than the euro but we still see it at lower levels against the dollar,” said Richard Driver, analyst at Caxton FX, adding it could head down to $1.5350 by the middle of next month.

Concerns are growing that Spain may be forced to seek an international bailout. Ten-year Spanish bond yields are trading above 6.5 percent, dangerously close to the 7 percent level beyond which borrowing costs are deemed unsustainable over the long-term.

Spain will seek to issue new bonds to fund ailing lenders and indebted regions, a move that would put further pressure on already stretched finances. Many are expecting it to eventually seek an international bailout as it struggles to recapitalise the banking sector.

The euro lost ground against the pound, easing to 79.80 pence, having earlier touched a two-week low of 79.735 pence. Further selling in the common currency could see it retesting the trough of 79.505 hit earlier this month, its lowest level since November 2008.

UK data on Wednesday showed Britain’s property market picking up in April, although broader lending figures suggested the overall economy was sluggish. UK mortgage approvals rose to 51,823 in April from 51,067 in March and well above forecasts.

Net mortgage lending grew by 1.139 billion pounds, also above expectations and the biggest increase since January. Money supply M4 growth also rose 0.7 percent month-on-month in April, up 3.8 percent from a year ago and its highest since first quarter 2009.

A soft number could have added to concerns about the Bank of England opting for more quantitative easing in the near term, a factor which would have dragged the pound even lower.

“The data is a little bit better than expected and, at the margin, it supports our call of no QE expansion at the June meeting,” Chris Walker, currency strategist at UBS wrote in a note.

A Reuters poll published on Wednesday showed that while the Bank of England may not pump more money into the economy when it meets next week, economists said there was an evens chance it would restart the printing presses at some point. (additional reporting by Anirban Nag; Editing by Ron Askew)

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