LONDON: Sterling staged a minor recovery on Monday as world stock markets rose and on increased demand for higher-yielding currencies, including the pound, although uncertainty over the prospect of Britain exiting the European Union checked gains.
Traders said a rally in stock markets helped a sterling rebound against the safe-haven yen and the lower-yielding euro.
Sterling was up 0.2 percent at $1.4250, having fallen to $1.4132 at the start of the European session, while the euro was flat at 79.425, well below a 22-month high of 81.17 hit late last week.
"A squeeze in short sterling/yen positions is pushing the pound higher. Given a recovery in stocks that is not surprising," one spot trader said.
Earlier, sterling had come under pressure as British finance minister George Osborne said a vote to quit the European Union in a referendum on June 23 would leave the economy 6 percent smaller by 2030 than if it stayed in the bloc.
Osborne said that leaving the EU would cost each of them thousands of pounds a year and sap funds for public services.
Investors also worry that Brexit would cause huge damage to a country with a trade deficit of 12 billion pounds, its widest in eight years, and a current account deficit that soared to 7 percent of GDP in the final quarter of 2015.
Adding another dimension to the debate, Scotland's first minister, Nicola Sturgeon, said over the weekend that Brexit would necessitate a new referendum on Scottish independence.
Opinion polls ahead of the EU referendum have indicated a tight race between the "Yes" and the "No" camps. Nevertheless, bookmakers are pricing in about a one-in-three chance that Britain will opt out of the union.
Major banks expect sterling could lose about a fifth of its value if Britain votes to leave. The International Monetary Fund also waded into the debate last week, saying Brexit would risk causing "severe global damage" that would drag down UK growth for years to come.
The cost of hedging against sharp swings in the pound remains elevated, trading near its highest since the global financial crisis.
"We are seeing Brexit coming to the fore in our discussions with clients," said Natasha Lala, managing director at OANDA, a firm that offers currency hedging advice to mid-cap companies.
"A lot of UK companies are gradually increasing the amount they need to hedge. I would say hedging ratios are rising to 70-75 percent from 65-70 percent before."
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