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Sterling soars vs broadly weaker dlr; falls vs euro

Source: Reuters - Sat 3rd Jul 2010

Sterling jumped to an eight-week high on Thursday, recouping losses on the back of a broadly softer dollar, but falling against the euro as European funding concerns eased.

Weak jobs, housing and manufacturing sector data slammed the dollar, pushing the pound up 1.2 percent to $1.5144 GBP=D4. Gains accelerated after stop-losses were triggered above $1.5000, $1.5030 and above, traders said.

That reversed earlier losses in the pound after lower-than-expected Chinese manufacturing data, which cast doubts over the global recovery and pushed equities lower.

The euro gained broadly, recovering from a blip after a European Central Bank tender that had been watched closely for signs of how euro zone banks were dealing with the repayment of almost half a trillion of emergency loans.

Smooth passage of Spain's auction of 3.5 billion of five-year bonds also eased concerns after a downbeat signal on its rating from ratings firm Moody's Investors Service the previous day.

"The (ECB's) step has done much to sooth nerves and may also have contributed to bond auctions in the euro zone passing without incident, especially for Spain which suffered a ratings review yesterday" said Geoffrey Yu, currency strategist at UBS.

The euro rose 0.6 percent to 82.32 pence after hitting the day's high of 82.57 pence, extending gains made the previous day on half-year end demand.

Next major target was seen at 82.76 pence, the low on June 22.


Analysts at Commerzbank said they maintain a negative bias for the euro, and see key short-term resistance at the May-to-June resistance line at 82.62 pence

"While capped here our outlook is negative" they said in a note, adding they target the 200-week moving average at 79.18 pence. The euro fell as far as 80.67 on Tuesday, its lowest since early November 2008.

The ECB's 6-day tender followed a 3-month offering on Wednesday which saw a lower-than-expected take-up of 131.9 billion euros. The two operations were aimed to alleviate funding demand before banks on Thursday repay the ECB some 442 billion euros of the one-year emergency loans.

Money market analysts argued that banks' take-up of the extra funding showed they were still hugely reliant on emergency cash and that tensions in the interbank market, whose functioning is vital to the economic recovery, remained strong.

BoE policymaker David Miles said in the Daily Mail newspaper that UK inflation was "uncomfortably" high but added there was no need for an immediate hike in interest rates.

That followed comments from fellow policymaker Adam Posen on Wednesday that he was not ready to back interest rate rises - despite signs that inflation expectations are creeping upward - because of the risk of a return to recession.

AA Bank of England (BoE) survey of credit conditions showed British banks plan to cut mortgage lending over the next three months due partly to higher expected funding costs, but raise their volumes of corporate and unsecured consumer lending.

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