Sterling falls on UK politics as rumours indicate that the PM may have to quit

Sterling underperformed other currencies on Friday, falling close to 1 percent against the dollar and the euro, weighed down by the political turmoil facing UK Prime Minister Gordon Brown. Late Wednesday another British minister resigned and called for the Prime Minister to stand down, while early results in Thursday's local elections in the UK suggested a very poor showing for the ruling Labour Party. "The market is waking up to what a mess politics are in the UK and that is causing sterling to underperform," RBC currency strategist Adam Cole said. Traders also noted that news that UK mining company Rio Tinto is planning a $15.2 billion rights issue was also weighing on sterling. The GBP/USD is currently trading at $1.6050 as of London Time.

The dollar is trading at “too low” a level given the recovery in the U.S. private-sector economy, according to a report from UBS AG, the world’s second-largest currency trader. Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday large U.S. budget deficits and speculation the economy will rebound are pushing up government yields. “It’s been a one-way show for the dollar, and it doesn’t need to stay like that,” Germanier said in an interview. “If you don’t think the Treasury market is falling apart, then it’s a good time to look at dollar upside.” Fewer Americans filed for unemployment benefits last week, signaling an end to the most acute phase of job losses. Initial jobless claims fell by 4,000 to 621,000 during the week ended May 30. The EUR/USD is currently trading at $1.4180 as of 10:55am, London Time.

The euro may exceed a five-month high against the greenback as central banks of developing countries sell some of their dollar reserves, according to Bank of America-Merrill Lynch. A recovery in demand for higher-yielding assets beginning in March led some central banks to buy the dollar to limit the appreciation of local currencies and support exports, Bank of America-Merrill Lynch analysts led by London-based Steven Pearson and New York-based Daniel Tenengauzer wrote yesterday in a research report. Dollars accumulated by some central banks now exceed the targeted weight, the analysts added. Diversification selling of the dollar by emerging-market central banks will be about $10 billion per month, about one- third the pace before the September collapse of Lehman Brothers Holdings Inc., according to Bank of America-Merrill Lynch.

Today's Economic Events