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Brexit vote boosts pound; euro dips on economy woes

London

THE euro hit a seven-week low against the pound and fell against the dollar on Wednesday, pushed lower by worries about the euro zone economy while sterling was strong ahead of a no-confidence vote on British Prime Minister Theresa May's government.

Mrs May faced the vote on Wednesday after a crushing defeat of her Brexit divorce deal in parliament left Britain's exit from the European Union in disarray just 10 weeks before it is due to leave. Although the pound had sunk by more than 1 per cent against the dollar earlier in the day on Tuesday, it rallied after the parliamentary vote as Mrs May's heavy defeat was seen forcing Britain to pursue different options.

"One thing seems clear - this deal they voted on is now dead, I doubt they can make a few tweaks and salvage it," said Richard Falkenhall, a senior FX strategist at SEB. "You have to look at alternatives to them: there is no support in parliament for a no-deal Brexit so you end with a softer Brexit, or maybe even a second referendum," he said.

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Adam Cole, chief currency strategist at RBC, added that if the opposition Labour party lost the confidence vote as expected, it could switch its focus to a second referendum, again increasing the possibility. As a consequence, the single currency fell as much as 0.3 per cent against the pound in early trade, hitting a seven-week low of 88.44 pence, and was trading at around 88.57 pence, down 0.20 per cent on the day. The euro also dropped 0.3 per cent against the dollar to its lowest since Jan 4 at US$1.1378, compressed by worries over the euro zone's economic outlook.

Earlier this week, data showed Germany barely escaped a recession in the second half of 2018 and European Central Bank chief Mario Draghi warned on Tuesday the euro zone economy was weaker than expected. On Brexit, a high degree of uncertainty has to be factored into market projections, others warned.

"Everything remains possible: new elections, an extension of the deadline for Article 50, or even a second referendum," said Stefan Kreuzkamp, chief investment officer at DWS. "Like many of our peers, we continue to hope for an orderly exit of the United Kingdom from the EU. But the path to get there remains unclear, and in any case cobbled with plenty of hurdles."

The dollar eased 0.1 per cent to 108.80 yen after advancing 0.5 per cent against its Japanese peer overnight, amid a further ebb in risk aversion with US stocks posting strong gains. REUTERS