Sterling resumed its role as a risk-driven currency on Friday and was on track for its biggest daily fall in weeks against the dollar as global market sentiment turned sour after the latest standoff between Washington and Beijing.
World stocks tumbled and the US dollar rose after U.S. President Donald Trump banned US transactions with two popular Chinese apps: Tencent’s messenger app WeChat and ByteDance’s video-sharing app TikTok.
Ties between the world’s two largest economies have been strained for months, with the United States blaming China for the novel coronavirus outbreak and moves to curb freedoms in Hong Kong.
After three days of falling, the dollar appeared to regain its functioning as a safe haven, rising against a basket of currencies.
Cable fell as low as $1.3086 and was only a touch off that at $1.3090 at 1006 GMT, down 0.4% since New York’s close.
Having rallied since the end of June, it was on track to end the week up less than 0.1%, compared with its 2.3% rise last week and 1.8% the week before.
Versus the euro sterling was slightly up at 90.265 pence per euro.
The pound rose to a five-month high on Thursday after the Bank of England struck a less pessimistic tone about the coronavirus-battered British economy.
Traders also took confidence from the absence of signals that the BoE might introduce negative rates. The possibility of negative rates has been cited by analysts as a reason for recent sterling weakness.
Negative rates “are part of our toolbox … But at the moment we do not have a plan to use them,” BoE Governor Andrew Bailey said.
Britain’s finance minister, Rishi Sunak, said on Friday that hardship lies ahead for the economy and that Britain cannot sustain the level of borrowing it has undertaken to support it through the coronavirus pandemic.
A Reuters poll found that sterling is expected to lose some of its gains this year due to fears around Brexit and COVID-19.
The range of 12-month forecasts was wide: $1.18 to $1.44.
Britain’s transition period with the EU is due to end on December 31, after which it will leave the single market and customs union.
No post-Brexit trade deal has been struck, leaving the City of London set to lose unfettered access to its biggest customer.
Britain’s foreign exchange reserves rose to a new high in July, with their largest monthly increase since June 2019, Bank of America strategist Kamal Sharma wrote in a note to clients.
Sharma said that this was driven mainly by valuation effects but that he thought the UK would continue to build its currency reserve base.
“With Brexit looming and a skinny trade deal likely at best, we continue to believe that there has been a step change in GBP liquidity conditions more akin to the more liquid emerging market currencies,” he said.
Source: SABC News (sabcnews.com)