Sterling slips back below $1.25 as dollar rallies

LONDON: Sterling fell around 1 percent against the dollar on Monday, as the greenback followed U.S. bond yields sharply higher across the board on expectations of a spike in inflation following Donald Trump's U.S. presidential election victory.

The pound has just recorded its best fortnightly performance on a trade-weighted basis in eight years, with investors' focus having turned away from Brexit and towards political risks elsewhere.

Italy has a constitutional referendum next month, French and German national elections are due next year and the fallout from Trump's election is also among the perceived risks.

A Trump presidency was also seen by investors as potentially strengthening Britain's hand in its negotiations with EU leaders as it leaves the European Union, a view strategists said had boosted the pound.

Trump's victory in last Tuesday's election has also sent the dollar to its highest in 11 months as bond yields have spiked higher, with expectations that he would boost spending and put more restrictions on trade, moves seen as potentially ending the low inflation which has ruled the past decade.

Having surged to a five-week high of $1.2673 last week, sterling fell to $1.2490 as the dollar soared.

"The fall is on the back of broad dollar strength - the market is taking the initial view that a president Trump will be favourable for the dollar in the year ahead," said MUFG currency economist Lee Hardman.

"The market is placing greater focus on the more positive aspects of his plans, with the loosening of fiscal policy seen supporting growth and enabling the Fed to tighten monetary policy more than the market was anticipating."

Hardman added that Trump's election had taken some attention away from Brexit and had led to investors unwinding short positions on the pound.

Data from the Commodity Futures Trading Commission released on Friday showed speculators cut their bets on pound weakness for a fifth straight week, after short positions hit a record high.

"Considering that overall short positioning remains elevated, further corrective sterling upside seems likely in the short term," wrote Credit Agricole strategists in a research note. "We favour upside against the euro, where positioning is broadly balanced."

Against the euro, sterling edged up 0.1 percent to 86.055 pence, close to a seven-week high of 85.67 pence struck on Friday.