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Sterling falls as risk appetite takes a knock

London, November 12, 2007

Sterling fell versus the dollar and yen and hit its lowest in nearly three years against the euro as risk averse investors pared back positions in relatively risky carry trades and sold the high-yielding pound.

Falling stock markets and general concern about the health of global financial institutions since the credit crunch have led investors to scale back carry trades where they borrow low-yielding currencies like the yen to fund purchases of higher yielding assets.

"Whenever risk appetite is not good we get the carry trade unwinding which hits the pound and focuses investors on the fundamentals of the (UK) economy which are not good, like the housing market," said Sebastien Galy, currency strategist at Dresdner Kleinwort.

Figures from the Department for Communities and Local Government showed British house prices rose at 10.8 per cent year-on-year in September compared with a revised 11.3 per cent increase in August.

At 1516 GMT the pound was down 1.3 per cent at $2.0622, a two-week low. The euro was up 0.4 per cent at 70.46 pence, having earlier climbed as high as 70.55, its highest level since January 2005.

Versus the low-yielding yen, sterling fell as low as 225.33 yen, a three-month low.

Sterling dipped briefly when thick black smoke was seen rising from a building in East London but recovered slightly when it turned out to come from a fire at an empty warehouse and police ruled out a terrorist attack.

Increasing food and petrol prices pushed UK factory gate inflation to its highest level in 12 years in October, denting expectations of an imminent cut in interest rates.

The Office of National Statistics said output prices rose a non-seasonally adjusted 3.8 per cent for the year -- its highest level since December 1995. Reuters




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