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Pound hits new low on Brexit nerves

BBC News BBC News 6/07/2016
Traders at BGC© Reuters Traders at BGC

The pound has hit a fresh 31-year low against the dollar as worries over the UK's exit from the European Union continued to rattle financial markets.

At one point, it dropped to $1.2798, its lowest level since June 1985, before rebounding to $1.29.

Analysts blamed warnings from the Bank of England that Brexit risks were "crystallising" and fears about the UK commercial property market.

The pound has dropped 14% since hitting $1.50 ahead of the referendum result.

"Pessimistic predictions for sterling are coming true," said Andrew Edwards, chief executive of ETX Capital. "The pound is the chief proxy for the post-Brexit mood in the markets."

Against the euro, the pound was down 0.4% at €1.17 on Wednesday, having earlier hit its lowest level since 2013.

Who is affected by the falling pound?

Viewpoints: How low will sterling go?

Pound reaches 31 year low against the US dollar: The pound hit $1.05 in February 1985© BBC The pound hit $1.05 in February 1985 Property sell-off

Stock markets have also fallen after last week's relief rally, with the FTSE 100 index down 1.3% at midday to fall back below 6,500 points.

Domestic companies such as supermarkets, housebuilders and banks have fallen sharply, and the FTSE 250 - which contains more UK-focused companies - was down 1.3% at 15,523.

Tesco and Morrisons were two of the biggest losers, with their shares dropping 7% and 6% respectively after analysts warned of a potential price war among supermarkets.

Property-related stocks have been especially hard hit this week after three fund managers decided to stop investors withdrawing money from their UK property funds. Shares in Barratt Developments and Taylor Wimpey fell by a further 5%,

"The suspension of commercial property fund redemptions by a number of big players has precipitated a broader sell-off in the UK property sector including housebuilders and other asset managers," said Michael Hewson of CMC Markets.

'Buyers' remorse'

European stock markets fell more sharply, with the Paris Cac, Frankfurt Dax and Madrid Ibex indexes all dropping by more than 2%.

Investors are showing some "buyers' remorse" after last week's stock market rebound and are focusing on "weak spots of the European economy", Mr Hewson said.

Europe's financial sector, in particular, is under pressure after the European Central Bank warned that Italian lender Banca Monte dei Paschi di Siena, the world's oldest bank, had dangerously high levels of bad debt.

Shares in Deutsche Bank earlier skidded to a record low of €11.40 and Credit Suisse hit its lowest level since 1989, although Monte Paschi is up 10% to €0.29 on hopes the EU will recapitalise the lender.

Earlier, Asian stock markets had closed lower, with Japan's Nikkei index down 1.9%.

Gold bars: The price of gold hit a fresh two-year high© Reuters The price of gold hit a fresh two-year high Flight to safety

Government bond yields have also fallen to record lows as investors rush to put money in perceived havens.

Yields on 10-year US, Swiss and German government bonds hit new record lows, while the return from a 20-year Japanese government bond turned negative for the first time on Wednesday, further underlining the hit investors are willing to take to keep their money in rock-solid government debt.

In the UK, the yield on 10-year gilts fell to as low as 0.731%, almost half its level on the day of the referendum vote.

High demand pushes up bond prices, and when the price of bonds rises, their yield falls.

The price of gold touched a two-year high of $1,371.40 an ounce. Also seen as a safe haven, gold surpassed the $1,358.20 mark it reached on 24 June in the immediate aftermath of the Brexit vote.

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