LONDON: Sterling held near a 10-month low against the dollar on Tuesday, while the cost of hedging against further weakness soared to three-year highs on worries about the potential impact of a Scottish vote for independence.
Better-than-expected economic data, showing British industrial output rising by the most in six months, failed to boost the pound, a day after it suffered its steepest fall in 2-1/2 years.
A TNS poll overnight showed a surge in support for those who intend to vote "Yes" to Scottish independence in the Sept. 18 referendum.
Though the poll still showed a narrow lead for those who intended to vote "No", it came just over a day after another poll put the pro-independence "Yes" camp in the lead for the first time, with 51 percent of the vote versus 49 percent for those wanting to keep the three-century-old union intact.
In the options market, the cost of hedging against further near-term sterling weakness hit its highest since December 2011. Sterling/dollar one-month implied volatility rose to 10.105 percent, Reuters charts showed.
"Scotland leaving the UK causes considerable uncertainty because there is no plan for what we do afterwards and ... uncertainty is the enemy of financial confidence," said Kit Juckes, macro strategist at Societe Generale in London.
The pound is centre-stage in the heated debate over Scottish independence. Nationalist leader Alex Salmond says Scotland will share the pound but Westminster has so far ruled that out, leading to considerable uncertainty about the currency.
The pound was flat on Tuesday at $1.6106, having hit a fresh 10-month low of $1.6065 in Asian trade. That leaves it almost 11 cents - or over 6 percent - lower than where it was eight weeks ago.
Against the euro, which is itself struggling against the dollar, the pound managed to edge up 0.l percent to 80 pence , having slipped against the single currency by over 0.9 percent on Monday.
UNCERTAIN OUTLOOK
Some traders fear that a Scottish split would leave the remaining UK saddled with higher debt and a smaller domestic market that could hurt future investments. And investors have already pushed back expectations of when the Bank of England will hike interest rates on the back of the latest polls.
Added to that a possible downgrade by rating agencies, uncertainty over North Sea oil revenues, possible trade barriers between the two countries and, crucially, the issue of which currency the Scots would use all help to paint an uncertain picture of Britain's economic outlook, analysts said.
The head of one of Britain's largest defence suppliers, France's Thales, on Tuesday voiced concerns over jobs and investment if Scotland votes to leave the United Kingdom.
Societe Generale's Juckes said that a Scottish vote for independence would also raise the likelihood of a British exit from the European Union, because of the advantage it would give to the Conservative party, which has promised an EU referendum. That would be a "major negative for sterling", he said.
Ilya Spivak, a currency strategist at DailyFX, said that sterling had probably seen the worse of its falls, for now.
"Having priced in a greater degree of secession risk, the markets may now find themselves without sufficiently novel news-flow to make the situation appear markedly worse at the margin," he said. "That hints that the ability of Scotland-linked worries to continue driving sterling is limited in the near term."
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