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Pound recovers vs dollar but stays on defensive

Source: Reuters - Thu 12th Aug 2010

The pound stayed not far from lows hit on Wednesday against the dollar, however, and well below Friday's six-month high just shy of $1.60. Analysts said the UK currency would remain vulnerable if investors continued to reduce exposure to risk.

It was helped by a tentative recovery in equities, with UK shares up 0.4 percent.

The pound lost ground against the euro, however, as the single currency rebounded broadly after steep falls on Wednesday which took it to a one-month low around 82.06 pence.

"The BoE's downward revisions and the statement that it could do more QE did weigh on sterling, but it is the dollar that has dominated trade" said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

"For the next day or two moves will be determined by market sentiment and equity direction."

On Wednesday, the BoE cut its forecast for UK growth and left the door open to more quantitative easing, at the same time predicting inflation would fall well below target in two years' time.

Sterling had also lost ground as more steps taken by the Federal Reserve to revive the U.S. economy pressured equities and boosted safe-haven flows into the dollar as investors judged a slowdown in the United States would impact the global economy.

By 8:54 a.m., sterling was 0.5 percent higher at $1.5700. On Wednesday it dropped around 1.4 percent to a low of $1.5615, its weakest since July 30, to post its biggest daily percentage loss since mid-May.

A break back below Wednesday's lows could see the pound head back towards its 200 day moving average, which currently stands around $1.5515.

The euro was up 0.2 percent to 82.30 pence.

"While renewed quantitative easing is not a central case for either the BoE or Fed, we view the chance of such action as more likely in the UK" ING currency strategists said in a note.

"This, together with confirmation that we have entered a more challenging risk environment, suggests that an already expensive sterling/dollar could have topped out at $1.60" adding that a close below $1.55 would further confirm this.

No significant events or data were scheduled out of the UK on Thursday.

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