Pound slips vs dollar, tracks euro lower on debt doubts

Sterling slipped against the dollar on Tuesday, tracking a weaker euro as investors speculated that euro zone policymakers may take a less proactive stance on dealing with the region's debt crisis than some in the market had hoped.

The pound suffered as investors sold higher-risk currencies versus the dollar after Spanish Economy Minister Elena Salgado said an extension of the euro zone's bailout fund to 2 trillion euros was not on the table.

Sterling has recovered from a one-year low hit versus the dollar last week but it remains vulnerable to more selling on growing speculation the Bank of England may soon implement more monetary stimulus in the form of quantitative easing as the recovery in the UK economy loses pace.

"A lot of the attention is on Europe at the moment," said Audrey Childe-Freeman, currency strategist at JPMorgan Private Bank, adding that selling in sterling on Tuesday was driven by euro losses against the dollar.

But she added: "We still have QE looking like a possible outcome in the UK in October or November, along with a challenging fiscal environment, which could be negative for sterling," she said.

Sterling traded at $1.5550 in early London trade, not far from a session low of $1.5531.

Despite Tuesday's selling, the pound hovered above the $1.5326 hit late last week, its lowest since September 2010, when investors fled to the safety of the dollar on growing speculation that Greece might default on its debts.

Analysts say the UK currency has entered a new range of $1.50-1.60, after rising speculation of more QE has pushed it out of the $1.60-1.67 range it traded in for much of the year.

The euro was a touch lower on the day at 86.91 pence, hovering within range of a six-month low of 85.31 pence hit earlier in the month.

Sterling has tracked falls in the euro against the dollar on escalating worries that debt problems in weaker euro zone countries may spread to stronger ones, and traders expect further euro losses will limit any upside in the UK currency.

Downward pressure has also increased after minutes from the latest Bank of England policy meeting flagged an increased readiness to ease monetary policy further.

This would be negative for sterling, as it would require the BoE to print pounds and flood the market with the currency, cutting demand.

BoE policymaker Ben Broadbent on Monday fuelled the view the central bank is mulling more QE when he said the UK economy would not have to weaken much more to warrant more stimulus.

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