Pound falls vs dollar, rises vs euro on bank woes

By Samuel Indyk

LONDON (Reuters) - The British pound fell against the dollar but surged against a tumbling euro on Wednesday as markets fretted about the state of the European banking system as the fallout from the collapse of U.S. tech lender Silicon Valley Bank gathered pace.

Shares in Swiss lender Credit Suisse plummeted more than 30% at one stage after its largest investor said it could not provide more financial assistance to the bank.

The slide led the wider European banking index lower, triggering demand for the safe-haven dollar and away from high-beta currencies such as the pound.

But worries of another European banking crisis were also weighing on the single currency.

The euro was 1% lower against the pound at 87.42 pence, after earlier dropping to 87.19 pence, its lowest level since Dec. 20, 2022.

"The focus has shifted from a U.S. banking story to the Credit Suisse story and markets are assessing the ramifications of possible contagion," said Francesco Pesole, FX strategist at ING.

"Markets are seeing the euro zone markets likely hit first and British markets to be slightly more shielded, so it makes sense that the euro is performing worse than the pound at this stage."

(Graphic: Eurogbp - https://fingfx.thomsonreuters.com/gfx/mkt/lbvggjnorvq/Pasted%20image%201678893409427.png)

The pound was last down 0.7% against a broadly stronger dollar at $1.2070, having hit a one-month high of $1.2203 on Tuesday.

The dollar index, which measures the currency against a basket of six others including the pound, was up 1.1% at 104.86.

Traders now see the Bank of England pausing rate hikes as the most likely outcome at its March policy meeting. Investors see around a 40% chance of a 25 basis point hike and around a 60% chance they keep rates unchanged.

Last week, the chance of a BoE rate pause stood at around 10%.

Focus was also on Westminster where British finance minister Jeremy Hunt announced a fiscal plan that he hopes will speed up Britain's stagnating economy, while upgraded economic forecasts showed the economy would now avoid a recession this year.

"Other events have stolen the headlines but this was never likely going to be a headline reaching budget anyway," said Jane Foley, head of FX strategy at Rabobank.

(Reporting by Samuel Indyk; Editing by Mark Potter, Kirsten Donovan)