Sterling weakens as eurozone’s problems unsettle the markets

Sterling tumbled to an eight-and-a-half-month low against the dollar yesterday as investors, worried about the continuing fiscal difficulties of some eurozone countries, fled to the safety of the greenback.

The pound has plummeted by nearly ten cents since mid-January amid mounting fears over how countries, including Greece and Spain, will meet their debt obligations.

In a further sign of the concerns surrounding the UK economy, the spread between ten-year gilts and German government bonds hit a two-and-a-half-year high yesterday.

There was a slight respite for the euro as it rallied against the dollar and the pound, but analysts said that the currency was likely to remain under pressure. The currency has fallen almost 10 per cent from a 15-month high of $1.5145 reached in late November.

The scale of the problems in the eurozone was illustrated as new data showed that currency speculators had ramped up their bets against the euro to record levels this month. Data from the Chicago Mercantile Exchange, often used as a proxy of hedge fund activity, showed that investors had bet $7.6 billion in short positions against the euro in the week to February 2, the highest level since the single currency was created in 1999.

This came as Joseph Stiglitz, the Nobel prize-winning economist, called for eurozone authorities to “burn” the speculators. “The speculators will always look for the weakest link,” he told Sky News. “What they’re doing now is a version of the Hong Kong double play in 1997-98.

“What Hong Kong did in response was to raise interest rates and intervene in the stock market. They burnt the speculators and Europe needs to do the same thing.”

In an attempt to allay fears about their country’s finances, Elena Salgado, the Spanish Finance Minister, and José Manuel Campa, her deputy, flew to London yesterday to meet bondholders. Ms Salgado has criticised foreign media organisations for highlighting weaknesses in the Spanish economy.Sterling came under additional strain over anxieties about the deteriorating state of the UK’s finances. The pound fell to its lowest level against the dollar since May last year, hitting $1.5535 before paring these losses slightly, rising to $1.5640, flat on the day.

The euro rose by 0.5 per cent against the pound to 87.98p, its strongest in two weeks, before falling back to 87.60. There were concerns about demand at today’s 25-year gilt auction after the Bank of England decided last week to end quantitative easing.

Gráinne Gilmore, The Times 09-02-2010