Sterling hits 2-1/2 yr low vs dlr on fresh bank stress

Tue, Oct 7 2008, 09:55 GMT
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LONDON, Oct 7 (Reuters) - Sterling slid to 2-1/2 year low versus the dollar on Tuesday, as a fresh bout of fear blew through stock markets with reports that the UK government could be forced to provide funding for Royal Bank of Scotland.

RBS shares fell almost 40 percent at one point and were last down 30 percent on the day at 103.9 pence, with Lloyds TSB and Barclays also losing ground after the BBC said the three big banks had asked the Treasury for 15 billion pounds each.

The chief executive of RBS declined to comment on what he described as speculation of any action the UK government might take to help banks, including talk it might inject capital [nWLB2092].

Investors have sold the pound in waves, leaving it down almost 13 percent in the year to date against the dollar, with nerves jangling on Britain's economic outlook as the dominance of financial services leave it highly exposed to a deepening global crisis.

"Sterling is coming under pressure on increased concerns of the banks. Banking shares have come under pressure again today," BNP Paribas senior currency strategist Ian Stannard said.

By 0920 GMT, sterling was down 0.4 percent on the day at $1.7370, having earlier hit a 2-1/2 year trough at $1.7322 <GBP=>. The euro was up 0.8 percent at 78.02 pence, with gains accelerated by the banking sector worry.

The RBS news threw a curveball to sterling, which had been rallying earlier after a surprise full percentage point interest rate cut from Australia raised clamour for decisive easing in Britain to deafening levels.

The Reserve Bank of Australia cut its rates to 6 percent. Investors have increasingly been looking to coordinated action in an attempt to arrest the deepening financial crisis.

G7 finance ministers are due to meet this weekend, but before that the Bank of England's rate verdict -- due on Thursday -- has come into sharp focus.

A Reuters poll last week showed 49 of 62 analysts surveyed said the BoE would cut rates from 5.00 percent at its October meeting. Four of those expecting a cut said it would be 50 as opposed to 25 basis points.

But interest rate futures markets are now largely pricing in a 50 basis point cut.

"There's an expectation that the Bank of England could follow the RBA and a rate cut could some earlier than expected, but we still have to wait for it -- there's still no concerted action," CBCM currency strategist Antje Praefcke said.

UK data released earlier continued to paint a gloomy picture of the economy and concentrate minds on the rate outlook.

British manufacturing output fell more than expected and for a sixth consecutive month in August to register its longest losing streak since 1980, official data showed [nONS003820].

(Reporting by Veronica Brown; Editing by Andy Bruce) Keywords: MARKETS STERLING/OPEN

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