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Sterling takes a knock, euro holds

Tuesday, June 24 12:44:26

The British pound fell today, on track for its biggest daily decline in two weeks against the dollar, after Bank of England chief Mark Carney did little to bolster interest rate hike expectations.

The pound fell around a third of a percent against the euro, leading to broad gains for the single currency. The euro barely reacted to a German IFO survey that showed sentiment weakened more than expected in June, as concerns grew among companies in Europe's largest economy that conflict in Ukraine and Iraq would hurt their business.

It was Carney's testimony to lawmakers that was the highlight of the European session. Carney, his deputy Charlie Bean and monetary policy committee member David Miles all emphasised the UK economy still had spare capacity that needed to be used up before interest rates rose.

Amid higher-than-usual volumes on the Reuters platform, sterling fell 0.3 percent to a day's low of $1.6973, its lowest in a week. The euro was up 0.3 percent at 80.15 pence .

"The comments have been less hawkish than they might have been," said Adam Cole, the head of G-10 currency strategy at RBC Capital. "Carney is acknowledging that wage growth has been weaker than expected and Miles is repeating that he thinks there is more spare capacity in the economy."

Sterling had risen to its highest in nearly six years last week against the dollar, after Carney seemed to make a U-turn on policy earlier this month, saying rates might rise earlier than many were predicting. That led investors to move up expectations for a rate increase to later this year instead of the first quarter of 2015.

Explaining why he signalled that rates might rise sooner than markets were expecting, Carney told lawmakers that investors had not adjusted enough to strong UK economic data.

While British data has generally exceeded expectations, euro zone data has fallen short, and things were no different on Tuesday. The think tank Ifo's business climate index fell to 109.7 from an unrevised 110.4 in May, its second straight monthly loss and short of forecasts for a 110.2 reading.

The euro, though, brushed aside the survey and was last up 0.15 percent at $1.3620, helped mainly by its gains against the pound. But traders are wary of pushing it higher, since the data were likely to bolster expectations the ECB will ease policy further.

On Monday, German PMI data fell short of expectations, suggesting the economy may be losing momentum.

The yen was steady against the euro and the dollar , as Japanese Prime Minister Shinzo Abe detailed his so-called "Third Arrow" policies. Those include phased corporate tax cuts and changes to the $1.26 trillion Government Pension Investment Fund (GPIF), the world's biggest pension fund.

Abe told reporters recovery had yet to reach broader sectors of the economy, stressing the need to ensure the positive economic cycle was not a temporary phenomenon.

"Much of the attention, particularly from foreign investors, is on GPIF reform," said Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo. "But judging from what the GPIF has been implying so far, portfolio allocation details are not expected to be revealed until August or even October, so any market reaction is likely to be limited."

Abe's government is pushing the GPIF to buy more stocks and invest less in government bonds, which is expected to have repercussions on financial markets given the fund's size. (Reuters)