Bank of England policymaker Paul Fisher dovish tone kept alive the prospect of more qualitative easing in the UK. This has dropped Sterling to a session low against the dollar and the euro this morning.

Pound Sterling – UK Markets

Fisher said if Bank of England policymakers saw mid-term inflation turning into deflation, they may have to consider more quantitative easing. He added QE was very much on the table as a policy option.

The pound depreciated 0.5 per cent to 1.1274 against the euro as of 9:48 a.m. in London, the weakest level since June 10. Sterling declined 0.1 percent to $1.6179 and 0.2 percent to 129.77 yen.

The forecast for the coming months remains gloomy. Britain ran up a record budget deficit in the first two months of the fiscal year despite a slightly larger than expected drop in borrowing in May, highlighting the tough road ahead for the government.

US Dollar – US Markets

The U.S. currency touched an almost one-week low versus the euro before Fed policy makers begin a two-day meeting amid signs the world’s largest economy is losing momentum.

A report that’s predicted to show new home sales in the U.S. slumped in May, adding pressure on the Federal Reserve to keep interest rates at a record low.

“The problems of the U.S. far exceed Europe’s despite all the focus on Greece and the peripheral economies,” said Grant Turley, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “The Fed doesn’t look like it’s going to be in a position to raise rates well into 2012, and that will keep the U.S. dollar under pressure.”

Euro – European Markets

The Euro softened in the morning as Euro-zone finance ministers failed to reach an agreement that would release the next tranche of 12B euros and would prevent Greece from defaulting on its debts.

Nevertheless, the EU backed the development of a second bailout for Greece and as a result the Euro erased the losses against the dollar and closed little changed at 1.4303.

Other Currencies – Highlights

The bond market is signalling doubts about Japan’s recovery from a record earthquake even as the Bank of Japan lifts its assessment on the economy.

The central bank last week raised its monthly economic assessment for the first time since February, as policy makers saw signs of a rebound. Data yesterday showed exports dropped by more than economists estimated in May, as Prime Minister Naoto Kan struggles to assemble a second supplementary budget before fulfilling a pledge to step down.

Nigel Hodges Currency Solutions