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REFILE-Sterling hits 2-1/2 year low against dollar as easing bets mount
March 7, 2013 / 9:38 AM / 5 years ago

REFILE-Sterling hits 2-1/2 year low against dollar as easing bets mount

* Sterling under pressure, investors wary of more QE

* BoE interest rate and QE total due at 1200 GMT

* Euro may retreat if ECB hints at looser policy in future

By Nia Williams

LONDON, March 7 (Reuters) - Sterling slumped to a 2-1/2 year low against the dollar on Thursday on mounting bets the Bank of England will choose to pump more monetary stimulus into the faltering British economy.

The pound dropped to $1.4965, its lowest level since July 2010, before paring losses to trade down 0.2 percent at $1.4990. Supporting bids from Asian investors were reported around $1.4900.

The Reuters consensus forecast is for the central bank to hold interest rates at 0.5 percent and keep the quantitative easing total unchanged at 375 billion pounds.

But strategists said many investors were considering whether policymakers will announce fresh asset purchases at 1200 GMT in a bid to stimulate economic growth.

If the bank holds fire on easing this month, bets are likely to rise that more money will be injected into the economy next month instead, keeping the pound under pressure.

Such quantitative easing (QE) involves printing money to buy bonds and tends to weigh on a currency by boosting its supply.

“There’s some expectation of further QE. Our base case is that it won’t happen today but it’s an extremely finely balanced decision,” said Raghav Subbarao, FX strategist at Barclays.

“If they do not do QE this month it basically just moves it to next month. Cable (sterling/dollar) could reach $1.45 over the next few months.”

Market players said the pound was also hurt by a media report that finance minister George Osborne will change the inflation remit for incoming Bank of England Governor Mark Carney, and flag looser monetary policy in his March budget statement.

The euro rose 0.5 percent against sterling to 86.83 pence, moving back towards a 16-month high of 88.15 pence hit on Feb. 25. Market players reported buying by a UK bank.

The single currency’s gains could be capped by speculation European Central Bank President Mario Draghi could use his 1330 GMT news conference to hint at loosening monetary policy in coming months, although the ECB is expected to hold off cutting interest rates today.

MARCH BUDGET EYED

Sterling has been one of the worst performing major currencies in 2013, falling nearly 8 percent against the dollar.

Better-than-expected data from the dominant services sector this week has failed to completely dispel concerns that the fragile economy could slip back into another recession.

The loss of Britain’s prized triple-A credit rating after a Moody’s downgrade also unnerved investors and called into question the government’s strict austerity measures.

Morgan Stanley strategists said the policy debate in the UK was likely to heat up ahead of the budget on March 20 and curb appetite to buy the pound.

“Fiscal policy is increasingly constrained, especially following the recent rating downgrade, and the government will have to rely more on monetary policy flexibility. Hence, even if the BoE takes no action today, we expect the sterling weakening trend to remain in place,” strategists said in a note.

Morgan Stanley said any rebounds in sterling should be viewed as selling opportunities, targeting a decline towards the $1.46/1.45.

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