British pound tumbles amid 'hung parliament' fears, uncertainty over QE By William L. Watts & Lisa Twaronite, MarketWatch LONDON (MarketWatch) -- The U.S. dollar lost ground versus the euro, with the single currency posting a modest rebound from last week's steep plunge after data showed stronger-than-expected activity in the euro-zone manufacturing sector. The U.S. unit was mixed versus other major rivals, edging higher versus the Japanese yen and soaring against a broadly weaker British pound, which was undercut in part by rising fears this year's election will produce a hung parliament. The dollar index (DXY 79.32, -0.13, -0.16%) , which tracks the greenback against a trade-weighted basket of six major currencies, traded at 79.409, little changed from 79.462 in late Friday's North American trading. The euro traded at $1.3897, up from $1.3868 in North American trade late Friday. The euro jumped 0.9% against the British pound to 87.48 pence and changed hands at 125.49 Japanese yen, a rise of 0.2%. The euro plunged last week as concerns mounted over Greece's ability to slash its deficit from more than 12% of gross domestic product last year to less than 3% in 2012. On Monday, a European Commission spokeswoman in Brussels said cuts are seen as achievable, but warned that risks surround the targets, according to a news report. The commission, the executive arm of the European Union, is set to release a full opinion on Greece's efforts on Wednesday. A stronger-than-expected rise in the final euro-zone manufacturing purchasing managers index for January to a two-year high of 52.4 aided the rebound, said Boris Schlossberg, director of currency research at GFT. "The euro has been grossly oversold over the past month and a possible rebound to $1.40 is due," he said. "However, the unit remains hobbled by concerns over Greece and Spain and, more importantly, may lose its luster as a risk trade if U.S. economic growth begins to surpass euro-zone activity." The dollar rose to 90.42 yen, from 90.29 yen Friday. Earlier in the session, it fell to a low of 89.97 as the yen got a lift from a news report hinting at a potential crackdown on the carry trade. The Times Online reported on its Web site over the weekend that Adair Turner, chairman of the U.K. Financial Services Authority, said that a big part of the foreign exchange trading business of the City of London was "economically valueless." The carry trade involves investors borrowing funds in lower-yielding currencies, such as the yen, to invest in assets denominated in higher-yielding currencies, such as the euro. Turner said that banks and hedge funds that borrowed cheaply in U.S. dollars to bet on higher-yielding investments in emerging markets were adding no value to the real economy, the report said. "If I could wave a magic wand here, and greatly reduce the carry trade, I'm pretty certain the world would be a better place," the report quoted Turner as saying. The British pound dropped 0.6% versus the U.S. dollar to trade at $1.5882. The euro rose 1% to fetch 87.58 pence. A stronger-than-expected jump in British manufacturing PMI to a 15-year high did little to boost the currency, which was overwhelmed by fiscal concerns and polling data, analysts said. Read about the jump in U.K. manufacturing PMI. Several polls over the weekend showed the opposition Conservative party's lead over British Prime Minister Gordon Brown's Labour party has shrunk to nine percentage points or less. Such a result in the election, which is widely expected to take place in May, would likely result in a hung parliament, with no party holding a majority. Fears a hung parliament would delay efforts to rein in Britain's budget deficit are a negative for the pound, analysts said.

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