Sterling falls sharply as rate outlook dims

LONDON (Reuters) - The sterling trade-weighted index fell to its lowest since October 2006 on Monday as troubles at one of the country's largest mortgage lenders dimmed expectations for a near-term interest rate increase by the Bank of England.

Last week the government authorised the rescue of Northern Rock (NRK.L: Quote, Profile, Research) after a global credit crunch impaired the lender's ability to raise cash in money markets.

The outlook for sterling has been damaged because the Northern Rock bail-out suggested that the global credit crisis that started in the United States has found it way to the UK economy.
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Analysts said that meant that the Bank may have finished tightening interest rates which should diminish the appeal of sterling assets to global investors.

"The situation with the state of British banks in the light of Northern Rock is putting pressure on sterling," said Hans Henrik Jensen, FX risk manager, at Jyske Markets in Silkeborg, Denmark.

The currency fell to a fresh 14-month low against the euro around 69.39 pence. By 8:50 a.m. the euro traded at 69.26 pence, up 0.3 percent.

The pound fell half a percent to $1.9992, dipping below the psychologically key $2 mark for the first time in nearly three weeks. On a trade weighted basis it opened at a one-month low of 102.30.

To appease the market Chancellor Alistair Darling said on Monday authorities would consider every option to solve the crisis at Northern Rock. He also said liquidity is not a problem for the financial system, but banks are reluctant to lend.