TOKYO: Sterling hit a record low against the euro on Monday, hurt by its yield disadvantage against the single European currency and inching closer to parity. A bleak outlook for the UK economy and expectations that euro zone interest rates are likely to stay higher than British rates in coming months, pushed sterling to a low of 96.315 pence on the Reuters dealing system. "The trend of weakness in sterling is likely to continue for a while longer," said an analyst for a Japanese foreign exchange broker. Sterling's fall against the euro gained momentum after some stop-loss sales at levels near 96 pence were triggered, said a trader for a European bank. If it hits parity against the euro, that would be the first time since the single European currency's launch in 1999. A trader at another European bank cited hedge fund buying of euros against sterling, as well as buying of euros versus the dollar by Middle Eastern players. Sterling fell as low as 96.59 pence, a record low against the euro but later trimmed some losses to stand at 96.39 pence, down 0.2 per cent from late US trading on Friday. Amid thin year-end trade, the euro rose 0.9 per cent against the dollar to $1.4154. "Some people may prefer to park funds in euros rather than dollars ahead of the year-end, but I don't get the sense that there is any major portfolio shift taking place," said a trader for a Japanese bank, referring to the euro's rise on Friday. Some market participants also noted that there was caution about potential speculative moves in light trade. "You need to be careful, or you could end up falling into a hole," said an analyst for a Japanese foreign exchange broker. GEOPOLITICAL RISK The dollar fell broadly, especially against the Swiss franc, which rose on safe-haven buying as Israeli warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day on Monday. "There are geopolitical risks, and the Swiss franc is being bought because of that, as is the theory in such cases," said a trader for a European bank. The dollar declined 0.8 per cent against the Swiss franc to 1.0590 francs. It dipped 0.3 per cent against the yen to 90.52 yen and also retreated versus sterling, falling 0.6 per cent to $1.4666. Some market participants said gains in the Swiss franc may not last long as investors shift their focus to near zero interest rates in Switzerland. The trader for a Japanese bank said the dollar's fall may be a sign of things to come in 2009. "There is the vague sense that the broad trend is toward dollar weakness," the trader said, adding that lingering uncertainty about the fate of US "Big Three" automakers and the health of the US financial sector could work against the dollar. The dollar index, which measures the dollar's value against a basket of major currencies, has risen 5 per cent for the year. But it has fallen 6.9 per cent in December, the steepest monthly fall since its 7 per cent drop in March 1985. The dollar fell earlier this month, partly because of market expectations for aggressive monetary easing by the US Federal Reserve. Such expectations were borne out by the Fed's decision in mid-December to slash interest rates to a range of zero to 0.25 per cent.

Source