Sterling fell against a broadly stronger dollar yesterday, losing some of its post-election shine as investors focused on the risks of a looming referendum on Britain’s EU membership and new government spending cuts. The pound posted its best performance in six years against the dollar in the last two weeks, surging after the pro-business Conservative party unexpectedly triumphed in Britain’s parliamentary election on May 7, winning an outright majority for the first time in 23 years. Investors had for months worried that no party would win a majority, which could have led to weeks of political uncertainty – a negative factor for sterling – until a coalition emerged. But with British finance minister George Osborne announcing on Friday he would spell out on July 8 how he plans to make further big cuts to public spending, investors are becoming concerned that such austerity will see the Bank of England hold off from raising interest rates for longer. Worries are also increasing about the impact of a British exit from the European Union if Britons vote to leave in a referendum promised by the Conservatives by 2017. On a positive note, Sterling has gained close on 2 cents against the euro, from around 1.3745 last night, to 1.3945 this morning.
The euro extended its losses this morning after tumbling in US trade on worries about the long-running talks between cash-strapped Greece and its creditors on reforming its bailout terms. Greece yesterday entered the final stretch of tortuous talks with the European Union and International Monetary Fund, with Athens calling for a breakthrough by the end of the month. The government and creditors have been stuck in a deadlock for four months over the reforms required to release a final 7.2 billion euros in bailout funds that are needed to service is debts. There are fears that if it defaults on those loans Greece could tumble out of the euro-zone. However, European economic affairs chief Pierre Moscovici said Greece’s anti-austerity leadership seemed more interested in ditching promised reforms than in making proposals of its own.
The dollar was almost unchanged against the yen in Asian trade this morning, with investors reluctant to push up the greenback any further ahead of U.S. and euro-zone indicators. The greenback followed on from its overnight gains triggered by an uptick in U.S. Treasury yields, but found it difficult to stay above the Y120 mark, close to the upper end of its recent trading range between Y118.50 and Y120.50. Analysts said that rather than making more headway into the upside, the dollar was likely to tread water or weaken unless the latest economic data pointed to a stronger U.S. recovery. But with market participants generally less convinced that a rate increase by the Federal Reserve will take place by the end of this year, the sustainability of gains in U.S. long-term yields and the dollar is uncertain.