Sterling rises versus dollar

Sterling rose against a broadly weak dollar on Monday, tracking a rally in the euro after an agreement between France and Germany on proposals to help solve the eurozone crisis raised confidence in currencies perceived to be higher risk. The pound was also supported by better-than-expected services PMI data, although it remains vulnerable to selling due to an overall gloomy view of the UK economy.
France and Germany on Monday agreed on a series of reforms to address the eurozone debt crisis what will be presented to EU President Herman Van Rompuy later in the week. Many in the market are hopeful this may be the week that will mark a turning point in solving the debt crisis, which may put upward pressure on the euro.
"If the euro crisis appears to get closer to a solution, sterling will benefit (against the dollar)," said John Hydeskov, currency strategist at Danske. A lasting solution would ensure that eurozone consumers will continue to buy UK exports, he added, which will help to support Britain's economy and in turn, the pound. Sterling rose 0.7 percent on the day to a session high around $1.5721. Demand from Middle Eastern investors had supported the pound early in the session, traders said.
The pound was supported after data showed activity in the dominant services sector, which makes up the majority of UK GDP, picked up slightly to 52.1 in November from 51.3 the previous month, wrongfooting forecasts of a slowdown. But despite the improved headline PMI reading, the survey also showed employers shed jobs at the fastest pace in more than a year, and did little to change the view that UK economic growth is faltering.
Britain's economy as a whole looks likely to barely grow in the final three months of 2011, after PMI surveys last week showed sluggish construction activity and the biggest fall in manufacturing since June 2009. Despite the euro's gains versus the dollar, it slipped 0.2 percent to 85.74 pence. Upside resistance is seen around 86.10-20 pence, a level that has capped euro gains since November 23.
Many in the market believe ongoing signs of weakness in the UK economy will put a damper on the pound as a fragile economy will require the Bank of England to continue buying assets from the market, which would flood the market with the currency. Jane Foley, senior currency strategist at Rabobank, said she expected sterling to underperform the dollar as long as the eurozone crisis dragged on and curbed investor appetite to take on risk, although it may hold up against the euro.
In recent weeks, traders have tended to sell the pound amid broad demand for the dollar whenever headlines suggesting policymakers are struggling to make progress in resolving the debt crisis hit risk appetite. Sterling has been supported in recent weeks by investors switching out of eurozone government debt into UK gilts, although some strategists said this flow could dry up if the UK economic picture worsens.