London - Sterling fell against the dollar on Friday as worries over an escalation of tensions between Russia and the West drove investors to cut long positions in the pound and seek out more liquid and safe-haven currencies.
The pound's drop coincided with market speculation that Bank of England (BoE) Governor Mark Carney had given a dovish interview to a weekend newspaper.
But the rumour was quashed by a BoE spokesman, causing the pound to regain a little ground.
Worries about East-West relations following the downing of a Malaysian passenger plane over eastern Ukraine, as well as concerns over Israel's ground offensive in Gaza, have seen risk assets take a hit.
“Largely the market has been very long sterling and perhaps with some of the events that have happened over the past 24 hours, traders have taken some profits on those positions and have scaled back on some of the risk,” JPMorgan Private Bank currency strategist Sara Yates said.
Sterling slipped against the dollar to trade as low as $1.7037 but then edged back up to $1.7063, down quarter of a percent on the day.
Having hit an almost six-year high of $1.7192 on Tuesday, the pound is now heading for its second straight week of losses against the greenback.
The dollar was given a boost earlier in the week when US Federal Reserve Chair Janet Yellen sounded a less dovish tone than previously, telling Congress that if the labour market continues to beat expectations, interest rates hikes would come sooner than markets envisioned.
Traders expect the BoE to tighten monetary policy this year or early next, while the European Central Bank is set to keep policy loose and perhaps resort to asset purchases to avert the threat of deflation in the euro zone.
Sterling fell against the single currency too. The euro rose to 79.335 pence per euro before easing back to 79.20 after the BoE's assurance that no Carney interview would be published over the weekend.
Sterling has surged over the past year as Britain's economy has shown signs of a strengthening recovery, fuelling expectations that the BoE will hike interest rates before the year's end.
Earlier this week, the sterling overnight index swap curve implied a chance of a rate hike in November after inflation jumped more than expected.
But those expectations have been pushed back to December after data showed wage inflation was still subdued.
GILTS
Long-dated British government bonds enjoyed a third day of solid gains as geopolitical risks intensified, taking 30-year gilt yields to a fresh 13-month low of 3.307 percent.
Ten-year gilt yields were 2 basis points lower on the day at 2.57 percent - at the bottom end of this year's trading range - and their spread over Bunds tightened by a basis point to 142 basis points.
RBS gilts strategist, Simon Peck, said gilts had scope to outperform as markets reassessed exaggerated expectations of a rate rise which came after data on Tuesday showed an unexpected jump in inflation to 1.9 percent.
“The geopolitical stuff has had a bigger impact on the UK than other core fixed income markets as a result of that expectation (of a rate rise).”
Short-dated gilts fell, however, retracing some of Thursday's gains, and yields on two-year gilts were up 2 basis points at 0.84 percent.
Peck said they would be vulnerable if BoE minutes next Wednesday showed any hawkish hints.
He said that long-dated gilt investors were looking out for a government report on pensions reform expected next week, which could affect demand for debt used to back the annuities contracts which many Britons purchase on retirement. - Reuters