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Dollar rebound pushes pound below $1.35; UK negative rates risk in focus

01/11/2021 | 07:25am

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Jan 11 (Reuters) - The pound was among riskier assets hurt by the recovering dollar on Monday, falling below $1.35 for the first time in 2021, while investors weighed up the risk of the Bank of England introducing negative rates.

The pound is down against the dollar and euro this month, after December's last-minute Brexit deal was quickly overshadowed by tougher measures to combat the spread of a new variant of the coronavirus.

Britain's chief medical officer said the next few weeks of the pandemic would be the worst so far, and finance minister Rishi Sunak said the economy would get worse before it got better.

Widening U.S. Treasury yields and the expectation of more fiscal stimulus lifted the dollar on Monday, pushing sterling below $1.35 for the first time since Dec. 30.

At 1624 GMT, the pound was down 0.6% on the day against the dollar at $1.3481, but flat against the euro at 90.14 pence.

Bank of England policymaker Silvana Tenreyro said cutting rates below zero could boost the economy more than expanding asset purchases, but added that she had not decided whether now was the time for this.

Market participants are pricing in negative UK rates for as early as May, three months earlier than at the end of December, just after the post-Brexit trade deal was struck.

"The prospect of ever-tighter restrictions in the UK ... means that the economy is going to contract more in the first quarter of this year and that obviously puts more pressure on the Bank of England to consider easing policy at the next meeting in February," said Lee Hardman, currency analyst at MUFG.

"We now think negative rates will be put in place as early as next month."

He said this could push the pound down to around $1.32-$1.33 and 92-93 pence per euro.

Weekly CFTC futures data for the week to Jan. 5 showed that speculators kept a small net bullish position on the pound for the fifth week running.

"Although increased fiscal support has weakened the case for a quick rate cut, the UK has still been one of the countries worst affected by the pandemic," RBC strategists wrote in a note to clients.

"Combined with the negative effects of Brexit, it means we continue to expect that the Bank will ultimately be forced to take rates negative."

(Editing by Larry King and Kevin Liffey)

© Reuters 2021
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