Sterling dips on Dudley's comments, UK farm subsidies talk helps vs euro

LONDON: Sterling eased towards a 4-1/2-month low against the dollar on Monday, with the greenback boosted by comments from Federal Reserve policymaker William Dudley who said a US rate hike this year was very much on the cards.

Dudley, who heads the Federal Reserve of New York, said he was confident that weak global economic conditions and the strong US dollar would not permanently hold down inflation. And with inflation likely to rise and the economy growing, the Fed "will probably raise rates later this year," he added.

As such, the Oct. 27-28 Fed Open Market Committee meeting was "live" for the rate hike debate, he said.

"Dudley's comments deflated sterling," said a spot trader. "Against the euro, it is holding up, but mainly on expectations of farm subsidy payments from the European Union."

Sterling slipped to $1.5175, having traded well above $1.52 for much of the morning session in Europe.

At current levels, it was not far from a low of $1.5136 hit on Friday, its weakest since early May. Last week, sterling lost 2.3 percent, its biggest weekly fall since early March.

Against the euro, sterling was up 0.3 percent at 73.52 pence per euro, underpinned by talk of annual farm subsidy payments from the European Union to the UK on or before Sept. 30.

Traders said there was little impact on the shared currency from a vote in Catalonia that gave secessionists a majority of regional parliamentary seats.

Back in the UK, BoE Governor Mark Carney is due to speak late on Tuesday and is likely to reiterate that interest rates are probably headed up, given a gradually tightening labour market and a pick up in wages.

The final estimate of British second-quarter gross domestic product (GDP) is due on Wednesday and is likely to confirm the economy grew at a healthy annual pace of 2.6 percent, keeping the chances of a rate hike alive.

A clutch of purchasing managers' index (PMI) surveys later this week will also be watched for clues on what impact a slowdown in China is having on other economies.

"Although the recent commentary by several BoE officials suggested that the policy normalisation could start around the turn of this year, sterling has been under increased selling pressure," said Marshall Gittler, head of global FX strategy at IronFX Global.