Sterling struggling near recent lows after UK inflation drop

[January 13, 2015]  By Anirban Nag

LONDON (Reuters) - Sterling fell toward an 18-month low against the dollar on Tuesday, after data showed British inflation at its lowest since 2000, bolstering expectations that the Bank of England will keep interest rates suppressed for longer.

The dollar also reversed earlier losses against the safe-haven yen after European stocks moved higher and Wall Street futures edged up, leaving the dollar index 0.3 percent higher at 92.275.

The euro fell below $1.1800, dragged down by expectations that the European Central Bank will launch a full-fledged government bond buying program in the near term.

Data from Greece showed the economy mired in deflation while engineering orders in Germany fell 10 percent year-on-year in November.

"All these add to view that the ECB will have to act fast. Investors with long dollar positions will want to keep them and target recent lows in the euro," said Niels Christensen, FX strategist at Nordea.

"Sterling too has been hurt by the lower-than-expected inflation reading."

Sterling slid to $1.5077, not far from a 18-month low of $1.5134 struck last week, after data showed British consumer price inflation fall to an annual 0.5 percent in December from 1 percent in November. Economists had expected inflation to fall to 0.7 percent.

The dollar edged up 0.2 percent against the yen to trade at 118.50 yen, recovering from 117.74, its lowest level since Dec. 17, struck earlier on Tuesday. The dollar had also suffered due to lower U.S. Treasury yields.

"The drop in U.S. yields is putting a cap on the dollar," Jeremy Stretch head of currency strategy at CIBC World Markets said, adding that a sharp drop in oil prices was being seen by many as boding ill for global growth and demand.

Investors have been seeking safe-haven assets, including U.S. Treasuries, against such a backdrop.

Oil prices continued their rout, with Brent crude and U.S. WTI both falling to their lowest in almost six years. The benchmark prices have plunged 60 percent from their 2014 peaks hit in June. [O/R]

With the risk of deflation looming over the euro zone, the euro shed 0.3 percent to trade at $1.1795, not far above a nine-year low of $1.1754 hit last Thursday, with the ECB on the verge of printing money outright.

Benoit Coeure, a top ECB policymaker, told German newspaper Die Welt that the central bank is far advanced in discussions about whether to embark on a sovereign bond-buying program and could take a decision at its Jan. 22 meeting.

(Editing by Gareth Jones and Crispian Balmer)

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