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Sterling falls on U.S.-China escalation, erasing gains from BoE meeting - REUTERS

AUGUST 07, 2020

BY  Elizabeth Howcroft


LONDON (Reuters) - Sterling resumed its role as a risk-driven currency on Friday, falling against the dollar as global market sentiment turned sour after an escalation of U.S.-China tensions.

World stocks tumbled and the U.S. dollar rose after U.S. President Donald Trump banned U.S. transactions with two popular Chinese apps: Tencent’s messenger app WeChat and ByteDance’s video-sharing app TikTok.

Tensions between the world’s two largest economies has been simmering 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 $1.31 just after 0400 GMT and was at $1.3111 by 0736 GMT, down 0.2% since New York’s close.

Versus the euro it was broadly steady, at 90.33 pence per euro.

Sterling had risen to a five-month high on Thursday after the Bank of England struck a less pessimistic tone about the coronavirus-battered British economy. nL8N2F82PZ] The central bank said the economy would not recover its pre-pandemic size until the end of 2021.

Traders also took confidence from the absence of a signal that the central bank would 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,” Bank of England Governor Andrew Bailey said.

“Even though the tool was officially still on the cards the debate in the monetary policy report suggests that the central bankers are not convinced of the positive effects and are therefore only likely to use this step as a very last resort, Commerzbank FX strategist Thu Lan Nguyen wrote in a note to clients.”

Britain’s finance minister, Rishi Sunak, said on Friday that hardship lies ahead for the British economy.

He said he was optimistic a lot of the emergency government-backed loans given to companies during the pandemic will be repaid, and that a trade deal with the European Union was still possible in September.

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 Dec. 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.

Reporting by Elizabeth Howcroft, editing by Larry King

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