Pound Falls Broadly on Dubai’s Debt Problems

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palm-jumeirah-island-dubai
The Palm Jumeirah, Dubai, the world’s biggest artificial island. Home prices have crashed.

LONDON (Reuters) – Sterling fell on Thursday, with the euro hitting a one-month high against the UK currency, on worries about British banks’ exposure to debt problems in Dubai and concern over UK economic health.

The pound also fell sharply against the dollar, which recovered some of the previous day’s sharp losses, and dropped to a six-week low against a broadly firmer yen.

Traders and analysts said sterling was coming under pressure following Dubai’s move on Wednesday to restructure its biggest corporate debtor, Dubai World, and delay repayment on some of the company’s $59 billion (35.6 billion pounds) of liabilities.

“There are concerns regarding the extent of the exposure of the UK banks to Dubai, hence sterling is coming under pressure,” said Ian Stannard, currency strategist at BNP Paribas.

European bank shares fell more than 3 percent on Thursday on concern about their potential exposure to Dubai debt problems. The fall was led by HSBC , Standard Chartered , Barclays , Deutsche Bank and Royal Bank of Scotland .

The euro broke above 91 pence for the first time in a month to hit a high of 91.29 pence. It was last at 91.21 pence, up 0.7 percent

Sterling fell more than one percent against the dollar to a low for the session of $1.6500, more than two cents off an earlier high of $1.6740. It was last at $1.6524.

It also hit a six-week low against a broadly firmer yen of 143.49 yen and was last 143.30.

Analysts said concern over the outlook for the UK economy also weighed on sterling.

Data on Wednesday showed the economy shrank by 0.3 percent in the third quarter, less than the initial estimate of a 0.4 percent contraction but still heightening concerns that any UK economic recovery will be slow.

“The GDP data saw a modest upward revision, but that has not changed the bigger picture that the UK is lagging other countries such as the euro zone in terms of its recovery,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin.

Some traders said moves were exacerbated by thin trading due to the U.S. Thanksgiving holiday, while falls on equity markets encouraged selling of perceived riskier currencies, including sterling.

Sterling remains broadly under pressure on concerns about the economy and fiscal deterioration, as well as about the massive amount of stimulus injected by the central bank under its quantitative easing programme.

“From a fundamental long term point of view, we don’t see any reason to turn sterling positive in a context where the BoE is lagging the ECB in scaling down (a much more aggressive) monetary stimulation,” KBC analysts said in a note to clients.

(Reporting by Jessica Mortimer, editing by Nigel Stephenson)
Published: November 26, 2009

Source: Reuters

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