* Euro/sterling drops to fresh 3-1/2 year low
* Pound falls vs dollar after Bernanke comments
* Weaker UK inflation gives room for loose BoE policy
By Jessica Mortimer
LONDON, July 17 Sterling rose to a 3-1/2 year
high against a broadly weaker euro on Tuesday but fell against
the dollar after U.S. Federal Reserve Chairman Ben Bernanke gave
no firm hints the central bank would opt for another bout of
Bernanke told lawmakers the Fed bank stood ready to offer
additional monetary policy support but gave few details,
boosting the dollar as many in the market had anticipated he
would signal more stimulus in the coming months.
The pound fell 0.4 percent against the dollar to
$1.5578, well off a high of $1.5677 hit earlier as the U.S.
currency came under pressure before the Fed chief's testimony.
But it reversed earlier losses against the euro, which
dropped to 78.315 pence, its weakest since late
2008. It stopped short of a reported options barrier at 78.25
pence, traders said.
Earlier, sterling had fallen after weaker-than-expected UK
inflation data suggested the Bank of England had leeway to keep
monetary policy loose for some time, but the impact was limited.
The BoE announced a further programme of quantitative easing
via asset purchases earlier this month and policymakers will be
waiting to see how this feeds through into the economy.
"We saw an initial sterling sell-off but attention has
turned back to the dollar," said Jennifer Hau, currency
strategist at Lloyds.
"A weaker inflation number has prompted the argument that it
removes the obstacle to further stimulus. But it's hard to
expect that to have an underlying impact on sterling given they
have just announced more QE that is due to expire in November,"
The pound was expected to remain buoyant against the euro as
the euro zone debt crisis encourages investors to switch out of
the currency into perceived safer alternatives.
The euro was hurt by comments from Italian Prime Minister
Mario Monti, who said he expected the governor of Sicily to
resign given a growing financial crisis that has pushed the
autonomous region close to default.
Sterling has made steady gains versus the euro since the
European Central Bank cut interest rates earlier this month.
Data showed UK consumer price inflation fell to 2.4 percent
in June, its lowest since November 2009, and undershooting
forecasts for a reading of 2.8 percent.
Many analysts said falling prices justified the BoE's asset
purchases, intended to stimulate lacklustre economic growth, and
said the 375 billion pounds programme could be expanded.
"It seems like this will give the BoE room to manoeuvre.
They know they can now buy even more because inflation is
finally coming down," said John Hydeskov, chief analyst at
Quantitative easing can be considered currency negative
because the bond-buying programme involves pumping more pounds
into the system, potentially weighing on demand.
But some analysts said the data should be seen as positive
for the pound in the longer term as it could enable consumers to
spend more and help lift the UK economy out of recession.
"It will feed down into disposable incomes in households
which have been decreasing for the last few years, so eventually
it will be a good thing for sterling, but not intra-day today,"
said Danske Bank's Hydeskov.