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Sterling falls to a 1-month euro low

Friday, December 13 15:38:06

Sterling fell to a one-month low against the euro today, as higher short-term euro zone market rates lifted interest rate differentials in favour of the common currency.

The pound also fell to a two-week low against the dollar as investors trimmed long bets before a Federal Reserve policy meeting next week and a slew of British data including unemployment.

While the consensus view is that the Fed will not start withdrawing stimulus this month, there is increased market chatter that it could act and that has supported the dollar.

The euro rose 0.3 percent to 84.405 pence, its highest level since Nov. 13. It has risen 1.6 percent in the past month as the yield gap between short-dated British gilts and German yields narrowed to its lowest since early September.

The euro has gained broadly due to the European Central Bank's reluctance to loosen monetary policy further. As banks shy away from lending to each other towards year-end, inter-bank lending rates in the euro zone have risen to their highest in nearly 15 months, lifting the euro.

Repatriation of funds by European banks to shore up their balance sheets has also helped the currency. European banks will also return 22.65 billion euros of crisis loans to the ECB next week, tightening liquidity further.

Some said the euro's strength could wane once year-end factors were out of the way.

"Once the year-end is over, we will see short rates in the euro zone stop climbing but that doesn't mean they will come down. That should cap euro strength," said Geoffrey Yu, currency strategist at UBS.

The bank expects euro/sterling to dip towards 81 pence in 12 months, with sterling driven by a bounce in the UK economy.