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Sterling V Euro Highest In 4 Months

Source: Reuters - Mon 10th Jan 2011

Sterling hit its highest level against the euro in nearly four months on Monday as the single currency was stung by increasing concerns about sovereign debt problems in the euro zone.

Despite its slight gains against the euro, the pound hit the day's low versus the dollar after mortgage lender Halifax said UK house prices fell 1.3 % on the month in December, more than expectations for a 0.4 % fall.

The euro was on the back foot after a senior euro zone source on Sunday said euro zone countries are cranking up pressure on Portugal to seek financial help from the EU and the IMF to stem contagion risks from its debt problems.

Analysts said concerns that debt problems will extend beyond Portugal and Spain, another country which investors believe may have to seek aid, while their borrowing costs escalate, will keep the euro under selling pressure.

At the same time, some argued that sterling would be supported on speculation that increasing UK inflation pressures may require the Bank of England to consider raising interest rates in the coming months.

"There are so many pitfalls facing the euro this year," said Ankita Dudani, currency strategist at RBS.

"But it's not just bad news for the euro. Some people think UK inflation is so high that the BoE will have to raise rates sooner rather than later."

Still, she added that while data has shown that price risks are rising, speculation of a rate rise in the near term was premature given a run of uninspiring UK economic data, including weak services sector data last week.

The BoE is widely expected to keep rates unchanged at a record low 0.5 % when it holds a monetary policy meeting later this week. RBS expects the UK central bank will raise rates in November.

In early London trade, the euro fell as low as 82.85 pence, its weakest since Sept. 16, before pulling back to around 83.15 pence, little changed on the day.

Traders cited bids at 82.80 pence as helping the euro to recover from its early slide.

Sterling's gain versus the euro helped to push the UK currency's trade-weighted index to 81.40, its highest since mid-December.

Some traders said that while sterling would likely continue to climb against the euro, it would likely lose out to a broadly stronger dollar.

"TWI is back above 81.0, benefitting from a weak euro ... but EUR/USD and EUR/GBP are lower, so eventually Cable will get dragged lower with EUR/USD," said a trader in London.

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