Pound declines against dollar

Sterling hit a 2 1/2-month low on Thursday versus the dollar, which attracted broad safe-haven flows after weak demand at an Italian bond auction highlighted risks the eurozone debt crisis will worsen next year. In extremely choppy, holiday-thinned trade, the pound fell as low as $1.5361, its weakest since early October. Its slump against the dollar pushed the pound down to a two-week low versus a currency basket.
Italy's widely scrutinised auction of three- and 10-year bonds, while relatively well supported, did little to lower bond yields from around the levels at which struggling eurozone countries have had to ask for bailouts. Analysts expect the pound to suffer versus the dollar in 2012 as worsening European debt problems could wreak havoc on London's financial sector, while speculation about more Bank of England quantitative easing may also sting sterling in the new year.
Michael Derks, chief strategist at FXPro, said flows into the dollar would continue next year to the detriment of the pound, which could fall towards $1.50 early in 2012. "I would be surprised if the recent spate of dollar demand didn't continue into the new year, and if that is the case, then we're likely to see Cable drift back further," said Michael Derks, chief strategist at FXPro.
The pound is poised to end 2011 around 1.2 percent lower against the dollar. While little changed on the year, sterling came under stiff selling pressure versus the dollar in the second half as the absence of a near-term solution to the eurozone debt crisis prompted investors to dump relatively risky currencies in favour of the safety of the dollar.
Against the euro, sterling was little changed around 83.70 pence. A fall in 10-year UK gilt yields to a record low of 1.9550 percent did little to boost the pound, as official UK debt is mainly held domestically. Only around 30 percent is held by overseas investors, including those in the eurozone. Some traders expect the pound to struggle to extend significant gains beyond levels around 83.30 per euro - equivalent to 1.20 euros in sterling/euro - which attract demand for euros from UK importers.