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Sterling falls as unnerved investors flock to safe havens

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Sterling fell to a 13-month low against the euro and plunged almost three per cent against the yen to its weakest since 2013 on Thursday as unnerved investors fretted about global growth and sought out safe havens.

[LONDON] Sterling fell to a 13-month low against the euro and plunged almost three per cent against the yen to its weakest since 2013 on Thursday as unnerved investors fretted about global growth and sought out safe havens.

The pound has shed around 10 per cent against the single currency over the last two months on a push-back of expectations for Bank of England (BoE) interest rate hikes, and as worries about a referendum on Britain's EU membership leading to a 'Brexit' from Europe have weighed.

But the currency has also suffered from a turbulent start to 2016.

In times of economic stress, countries or regions running current account surpluses - such as Japan, the euro zone and Switzerland - are seen as safer compared with those that have deficits and rely on foreign capital to finance the gap.

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Britain and the United States fall into the latter category.

The euro, which was up across the board on Thursday, rose more than one per cent against sterling to trade at 78.73 pence, its strongest against the pound since early January 2015.

Sterling also dropped below 160 yen (S$1.99) for the first time since November 2013 on Thursday, down almost 3 per cent and leaving it on track for its biggest one-day fall in five years.

Against the dollar, it fell as much as 0.7 per cent, to US$1.44.

"I don't think there's a specific UK trigger today - there is risk-off sentiment and sterling right now is being treated as a risky asset," Rabobank currency strategist Jane Foley said.

Ms Foley said a Brussels summit at the end of next week, at which British Prime Minister David Cameron will try to agree to a reform package to keep Britain in the EU, would be key for sterling.

If the referendum comes is scheduled for June, she said, the currency would be set for a turbulent few months.

The cost of protecting against big swings in sterling's exchange rate against the dollar over the coming week jumped to an eight month high of 12.1 per cent on Thursday. The summit will take place next Thursday and Friday.

Sterling was also knocked on Wednesday by an estimate that showed Britain's growth slowed in the three months to January.

Interest rate markets are not pricing in a BoE rate hike until 2020.

Sterling overnight interbank average rates - the very short-term interest rates which form the basis of lending costs to the economy - are pricing in the chance of the first rate hike in five years time.

BoE policymakers will speak at parliament later on Thursday but analysts said their comments would be unlikely to impact sterling.

"They are likely to be questioned on the implications of UK EU exit, but if previous experience is any guide, this will give away very little on the Bank's views on the subject," wrote RBC strategists.

REUTERS

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