Stg drops to near 3-wk low vs dollar, may extend losses

LONDON: Sterling fell to near three week lows against the dollar on Wednesday, as investors preferred to buy safe-haven currencies and as fresh evidence of a patchy UK recovery left the pound vulnerable to more losses in the near term.

The US dollar extended gains after US core inflation rose more than expected in May, though events in Europe continued to dominate market sentiment and kept investors wary of riskier assets and higher-yielding currencies.

UK data on Wednesday showed the number of Britons claiming unemployment benefit rose sharply, while sluggish wage growth added to views that interest rates would stay on hold in 2011.

The Office for National Statistics said the number of people claiming jobless benefit in May rose by 19,600, more than double forecasts for an increase of 7,000 and the biggest rise since July 2009.

However, the numbers without a job on the wider ILO measure fell by 88,000 to 2.430 million in the three months to April -- the biggest decline since August 2000. That took the jobless rate to 7.7 percent -- in line with forecasts and down from 7.9 percent in the November to January period.

Wage growth slowed in the three months to April, with regular pay excluding bonuses rising at its weakest pace since last August. All of which backed views that a UK recovery was still on shaky ground.

"There is little scope for independent sterling strength based on UK fundamentals and the data has provided little support as expected," said Lena Komileva, Global head of G-10 strategy at Brown Brothers Harriman.

Sterling fell 0.8 percent to $1.6240, having dropped to a session low of $1.6227. A fall past $1.6216 would take it to its lowest level since May 25.

Traders cited stop-loss orders at $1.6215/20 with more support at $1.6210--the 23.6 percent retracement of the pound's fall from a high of $1.6747 on April 28 to its May 24 low of $1.6055.

It gained against the bruised euro, with the euro down 0.3 percent at 87.92 pence, not far from a two-week low of 87.74 pence.

The single currency was hampered by concerns over the health of the euro zone banking system and the Greek debt crisis after Moody's said it will review the ratings of French banks, focusing on their holdings of Greek debt.

Concerns over the British banking system also weighed down on sterling, with finance minister George Osborne set to support ring fencing of UK banks' retail arms in a speech later in the day.

"Sterling's price action isn't that great and the focus on splitting retail and investment banking units of British banks could start to weigh on UK confidence," said a London-based spot trader.

These measures come as sweeping spending cuts by the British government is expected to dampen economic growth and is likely to keep UK interest rates at ultra-low levels.

Markets continue factor out a rate rise in the UK until the second quarter of 2012 . Stubborn inflation is not expected to trigger a rise as the BoE has repeatedly warned it could hit 5 percent before retreating.

Copyright Reuters, 2011