Sterling slides as euro leans into banking storm

(New (KOSDAQ: 160550.KQ - news) throughout)

By Patrick Graham

LONDON, Feb 9 (Reuters) - Sterling sank to a more than one-year low against the euro but gained against the dollar on Tuesday as a wave of global concern over banks and other financial firms extended into a second day, hammering stock markets on both sides of the Atlantic (Shanghai: 600558.SS - news) .

Morning data in Britain had offered some support to the pound but analysts said trade was dominated by a reassessing and reweighting of portfolios by many major fund investors in the worst start for stock markets to a year since 2009.

Constantin Bolz, director for FX strategy with UBS Wealth Management in Zurich, said the pound had benefitted from a trimming of pro-dollar positions before Wednesday's testimony to Congress by U.S (Other OTC: UBGXF - news) . Federal Reserve chair Janet Yellen.

He and others also pointed to a broad unwinding of hedged positions in euro zone equities by non-European investors as benefitting the single currency.

"Given the fact that sterling has suffered quite a lot over the last few months, maybe for that reason it has done well against the dollar in these moves (this week)," Bolz said.

He also said that while the pound was exposed to any new round of global banking stress by its status as a financial centre, it was also less exposed to the negative interest rates - dominant in mainland Europe - that many have pointed to as banks' main problem.

The pound gained half a percent to $1.4491 by 1700 GMT. It fell by 0.6 percent to 78.07 pence per euro.

The morning's numbers included an unexpected pickup in the BRC (Shanghai: 600466.SS - news) measure of retail sales, offering some support for an economy battered since December by concerns over the coming referendum on European Union membership.

A bigger than expected tightening of the trade deficit, however, did little to shift the belief that Britain's 10 billion pound a month shortfall and high borrowing needs make it among the most exposed to another global market credit crunch.

"When there is global illiquidity, it is going to be more difficult to fund the deficit," said Hans Redeker, Morgan Stanley (Shenzhen: 002588.SZ - news) 's head of currency strategy.

"So in the UK we have a choice of either higher yields or a lower sterling, and in the current environment it is clearly going to be a weaker sterling."

Data from the Commodity Futures Trading Commission released on Friday showed speculators had trimmed their net bets against the pound last week. They had been adding to their unfavourable bets since the start of the year, pushing the pound to a seven-year low in late January.

"The pound remains on the back foot despite a less dovish than expected inflation report and an until now softer dollar," Citi analysts said in a note.