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Pound recovers some lost ground following Northern Rock inspired falls

Monday, February 18, 2008

LONDON (Thomson Financial) - The pound recovered some ground but remained sharply lower on the day after the UK government's plans to nationalise Northern Rock.

With other major currencies range-bound in quiet trade due to the US public holiday, the pound has been in focus following yesterday's surprise decision by Chancellor of the Exchequer Alistair Darling to take the troubled mortgage lender into public ownership.

Earlier the pound fell to a two-week low against the euro of 0.7521 stg and a one-week low against the dollar as news the stricken bank will be taken into public ownership heightened investors' concerns about the prospects for the UK economy.

"The pound was sold from today's European open, on the back of the continent's absorption of yesterday's Northern Rock nationalisation announcement," said Robert Howard, analyst at Thomson IFR Markets.

Meanwhile, relatively downbeat comments from Bank of England rate setter Tim Besley also weighed on the UK currency. The external Monetary Policy Committee member acknowledged inflation was set to rise in the coming months but also noted tighter credit conditions could lead to a fall in consumption.

Besley is generally seen as a hawkish member of the MPC, so highlighting the downside risks to consumer spending were seen by analysts as being particularly significant.

Meanwhile, the dollar was steady against the euro with trade quiet due to the US marking Presidents' Day.

The dollar fell heavily last week after US Federal Reserve chairman Ben Bernanke kept the door open for further cuts in interest rates due to continuing signs of trouble in the US economy.

It recovered some of these losses in early trade this morning but analysts are doubtful whether this will last over the rest of the week as fears about the prospect of a US recession mount.

On Friday, the University of Michigan consumer sentiment dropped by 11 points to its lowest level since Feb 1992, with previous falls of that magnitude generally seen as a prelude to recession.

"These weak US economic reports served to reverse the more optimistic attitude towards the economy which had been triggered by

stronger-than-expected retail sales earlier in the week," noted NAB Capital strategist John Kyriakopoulos.

Analysts said carry trades are likely to remain in vogue in these uncertain economic times. The yen and the Swiss franc are traditionally used in carry trades -- when a low-yielding currency is sold to finance investment in higher-yielding economies.

"In the present environment of significant risk-aversion we still feel that the yen and the Swiss franc will be the better performers amongst the major currencies," said Steve Barrow, currency strategist at Bear Stearns.

"Dollar/yen is expected to slide to around 100 yen this year and dollar/Swiss should fall to parity," he added.

London 1600 GMT London 1235 GMT

US dollar

yen 108.17 down from 108.22

sfr 1.1020 up from 1.1039

Euro

usd 1.4650 up from 1.4623

yen 158.50 up from 158.27

sfr 1.6145 down from 1.6146

stg 0.7506 up from 0.7456

Sterling

usd 1.9512 up from 1.9493

yen 211.18 up from 210.94

sfr 2.1501 down from 2.1521

Australian dollar

usd 0.9123 up from 0.9115

stg 0.4673 down from 0.4675

yen 98.65 up from 98.63

Posted by MOHAMED SAID at 10:08 AM  

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