Sterling surges vs softer dlr; risk aversion eases

Wed, Oct 29 2008, 16:10 GMT
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LONDON, Oct 29 (Reuters) - Sterling shot up on Wednesday, rising more than 2 percent versus the dollar, with investors easing back on extreme risk aversion as stock markets fired up.

Britain's FTSE 100 index surged after a massive rally in U.S. shares on Tuesday, rising more than 7 percent as investors eyed further central bank interest rate cuts to help stimulate flagging economies around the world.

The U.S. Federal Reserve's rate verdict is expected later on Wednesday, with futures markets pricing in a large probability of at least a 50 basis point rate cut from the current 1.5 percent.

Investors took advantage of steadier equity market sentiment to unload dollars, sending sterling on an upward course that helped offset losses of nearly 9 percent last week when deleveraging gripped global markets.

"The equity market has opened a little higher in the U.S. and in Europe there seems to be a slightly more positive market environment," said Audrey Childe-Freeman, senior FX strategist at Brown Brothers Harriman in London.

"Sterling is grabbing attention because we saw a violent move to the downside and now the upside move has also been extremely steep. But you have to bear in mind that sterling was one of the worst performers against the dollar last week and a correction was due," she added.

By 1535 GMT, the pound was up over 2.5 percent on the day at $1.6315, far above a six-year low of $1.5265 hit last Friday according to Reuters data. The euro was down 0.70 percent at 79.24 pence compared with a record high of 81.95 pence also hit last Friday.

British mortgage approvals for house purchases rose in September, according to Bank of England figures, but that followed a downward revision to August which showed the first net repayment since the series began in 1993.

Data on Tuesday showed no end in sight to the housing market slump that is hurting many Britons who borrowed heavily against the value of their homes during a long-running housing boom.

The Land Registry said house prices in England and Wales fell by 8 percent on the year in September to their lowest level in two years.

With the economy having shrunk 0.5 percent in the three months to September and recent financial turmoil expected to push the economy further into recession, economists expect the BoE to cut key interest rates by 50 basis points from 4.5 percent next week, with another easing to follow in December.

(Reporting by Nick Vinocur; editing by Stephen Nisbet) Keywords: MARKETS STERLING/CLOSE

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