Sterling rose against a broadly weak euro on Friday, approaching an 11 1/2-month high as concerns that the eurozone debt crisis will worsen in 2012 prompted investors to dump the single currency on the last trading day of the year. The euro fell half a percent on the day to 83.63 pence, closing in on 83.02 pence hit last week for the first time since early January. Against the dollar, the pound rose 0.3 percent to a session high of $1.5475.
With most traders absent for year-end holidays, currency moves were exacerbated in thin volumes. UK markets closed early on Friday and will be shut on Monday. While it has gained versus the euro this year, the pound has struggled against the dollar, which has outperformed in the second half of 2011 as worries about the future of the eurozone have sparked a flight to safety to the US currency. This has hammered relatively riskier currencies including sterling in past months, and sterling/dollar is poised to end the year near a 2 1/2-month low, having fallen around 1 percent since the start of 2011.
Euro/sterling has lost nearly 2.5 percent this year. As a result, the pound is on course to end 2011 with gains of 1.2 percent versus its currency basket, having hit a 10-month high of 81.70 last week. On Friday, it stood at 80.9.
Many in the market believe the pound may come under more selling pressure versus the dollar next year if European leaders are not seen to be making progress on solving the region's debt problems, which would be negative for the UK financial sector. The growing possibility that the Bank of England may further increase its purchases of UK assets next year to boost the economy is also considered a negative risk for sterling.
But some analysts say the pound could find support not only against the euro but also the dollar as the US currency is seen exposed to the risk of fiscal instability, with Washington struggling to agree budget issues and the economy limping along. "You wonder whether in this environment, sterling performs better because the Bank of England is being proactive, and no one is stopping it from doing more QE if that's what it requires," said Tom Levinson, currency strategist at ING.
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