LONDON: The pound hit a one-month low against the dollar on Monday as perceived riskier currencies came under pressure, and with a dour UK economic outlook likely to keep it subdued in the near term.
The dollar index was higher after a surprise drop in the US unemployment rate on Friday soothed concerns about the economy, driving investors to reassess the potential scale and duration of the latest round of asset purchases (QE3) by the Federal Reserve.
By contrast, data released last week suggested the UK economy grew only marginally in the third quarter with the construction sector still contracting and the dominant services sector growing much more slowly than anticipated.
Making an economic recovery even tougher, Chancellor George Osborne said on Monday that the bulk of savings in his budget would be through cutting government spending. That would add pressure on the Bank of England to ease monetary policy perhaps as early as next month.
"Sterling has been trading with a softer bias and has underperformed the euro in the past few sessions," said Michael Derks, chief strategist, at FXPro.
"This trend is likely to stay in place in the near term. More fiscal austerity means the Bank of England will have to weigh up measures for additional quantitative easing."
More QE usually has an adverse impact on a currency as it increases the supply.
Sterling was down 0.6 percent at $1.6045, having fallen to a one-month low of $1.6030 and with stop-loss orders cited below $1.6020. It has retreated from a one-week high of $1.6218 hit on Friday after riskier currencies got a lift from the strong US jobs report.
But those gains evaporated as US bond yields rose, with investors reassessing the need for more easing by the Fed in the near term. QE by the Fed has in the past boosted demand for riskier currencies and assets.
Gareth Berry, a currency analyst at UBS, said the latest US data, including the ISM surveys and the drop in the unemployment rate, pointed to a more constructive picture of a recovery there. In contrast, further gilt purchases in the UK would undermine the pound.
"Although a policy rate cut seems unlikely, quantitative easing still has ample scope to generate currency weakness," said Berry.
"With one-third of the gilt market now in the hands of the central bank, and no clear exit strategy in place, the risks to sterling are growing with each incremental extension of the program."
Sterling losses against the dollar drove the trade-weighted index to a two-month low, data from the Bank of England showed. The euro also reversed earlier losses to advance to its highest in three weeks against sterling.
It rose to 80.855 pence, having posted its biggest weekly gain since late February.
The euro faces near term resistance at the mid-September peak of 81.14 pence, with the focus squarely on Spain. The country is expected to apply for a financial bailout soon which will pave the way for the European Central Bank to step in and buy its government bonds to lower borrowing costs.
That should boost the euro against most currencies.
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