Sterling dropped versus the dollar on Monday, tracking losses in the euro against the safe-haven US currency as deep-seated concerns about the eurozone's huge debt problems outweighed investor optimism over a new Italian government. The pound fell more than 1 percent to hit a session low of $1.5891, triggering stops cited below trendline support around $1.5920.
Traders cited sterling selling by macro funds and Eastern European names as investors booked profits on the pound's broad gains so far this month. Market sentiment remained fragile, weighing on riskier currencies such as sterling after an Italian bond auction at which yields came down from last week's record highs but remained near critical levels.
The common currency outperformed the pound, last trading up 0.2 percent at 85.70 pence, but remained within sight of an 8-1/2 month low of 84.86 pence hit last week. Rabobank's Foley said that level was likely to provide strong support in the near term. Many investors have sold the euro in favour of the pound this month on the view that UK assets are safer than some eurozone ones in light of the deepening debt crisis in the region.