Sterling slips to euro and dollar

STERLING set a four-year low versus the euro and also slipped against the dollar yesterday, hit

International Development Secretary Clare Short said on Sunday she would resign if the country went to war without the backing of a second UN resolution.

The announcement came after Andy Reed, a Labour member of parliament, quit his post as a ministerial aide on Sunday, with speculation four others could follow.

“The general impression is that the Blair government looks a little bit more unstable and the general geopolitical fall-out that we may be going to a war without a UN backing is also weighing on the dollar and sterling,” said Steven Pearson, chief currency strategist at Halifax Bank of Scotland Treasury Services.

By mid-afternoon, sterling had lost two thirds of a percentage point from late New York levels on Friday to 69.27p per euro , its lowest since late February 1999. The latest drop brought sterling’s losses against the euro this year to 6%, close to the single currency’s 1999 launch level of 70.80.

Against the dollar it fell almost ½% to $1.5932, before recovering to $1.5986.

More than 120 Labour parliamentarians recently voted against the Government over war against Iraq, and more are expected to sign up to the revolt if there is no support from the UN.

“The political problems of Blair, with members of the Government threatening to resign, at least creates some uncertainty, even if it’s not a change in policy which may result,” said Rob Hayward, senior currency strategist at ABN Amro.

The UN Security Council is expected to vote this week on a joint US-Britain-Spain draft resolution that would give Iraq until next Monday to disarm or face military action.

In an attempt to gain a critical mass of support on the Security Council, Britain said yesterday it would be prepared to modify a draft resolution authorising war against Iraq.

On the economic front, official data showed unadjusted producer output prices rose 0.3% in February and 1.6% on the year, the highest rate since January 2001. Economists said the figures will not worry the Bank of England which last month predicted inflation would stay above its target for some time because of rising oil prices and still cut rates to a 48-year low of 3.75%.

Speculation is growing the BoE will deliver another rate cut in the near future given a series of disappointing British economic data.

“People expect more easing is likely from the Bank of England, which is not positive for sterling either,” said David Mann, foreign exchange strategist with Standard Chartered.

The Confederation of British Industry’s latest survey of the services sector out on Monday showed confidence in the sector fell back again due to uncertainties related to war with Iraq and a weaker outlook for consumer spending.

A survey by NTC research found growth in British output per unit of labour slowed for a fourth straight month in February to its most lacklustre pace in a year, driven by a productivity slowdown in the services sector.