Sterling falls as Brexit campaign enters final fortnight

LONDON: Sterling fell almost half a percent against the dollar and the euro on Friday as the cost of hedging against swings in its value around the June 23 referendum on Britain's European Union membership rose to the highest in seven years.

Since falling to a low of $1.38 in February, the pound has held up well in the face of concerns that a vote to leave would undermine economic growth and create problems with financing of the country's huge current account gap.

But with two weeks to go until the referendum vote, speculative investors and companies have pushed up the cost of hedging to imply swings of as much as 24 percent in the value of the currency over the next month.

That seeped through into spot rates for sterling itself as US markets came on line on Friday, pushing the pound back below $1.44 and a third of a percent weaker at 78.41 pence per euro.

"The fact is we're getting closer to the day and there has been a shift in the betting odds this week so we are seeing that in the options market," said Dominic Bunning, a strategist with HSBC in London.

The threat of Brexit has dominated since late last year, driving a decline of more than 10 percent in sterling on a trade-weighted basis between mid-November and mid-April.

Risk reversals are heavily skewed to sterling "put" options, showing investors are most worried about Brexit's threat to sterling.

But dealers and strategists say investors also want to be positioned for a jump in sterling if Britons vote to stay in the EU. Trading desks at the major banks expect the pound would gain to around $1.50-1.51 on a vote to stay.

"When you look at sterling itself, we would argue it is close to fairly valued given the extent of the risk that betting markets show," Bunning said. While polls have been mixed, a number of online surveys have tended to lean more towards the "Leave" camp and a poll for the BT.com website on Friday showed 80 percent of readers planning to vote to leave the EU.

The latest betting odds on website Betfair show the implied probability of a British vote to stay in the European Union at 74 percent, down from as high as 78 percent on Thursday.

"The nearer we get to the event, the more nervous markets will naturally become," said Lee Hardman, currency economist with Bank of Tokyo-Mitsubishi UFJ in London.