* Pound tumbles 3.5 pct vs dollar to 7-1/2 yr low
* Euro drops to 6-week low vs dollar, dlr index at 6-wk high
* Stronger-than-expected German ZEW fails to lift euro
* UK banking woes weigh on pound; euro hit by grim outlook
(Changes byline, adds quotes, updates prices)
By Naomi Tajitsu
LONDON, Jan 20 (Reuters) - The dollar climbed broadly on
Tuesday, boosted by sterling's tumble to a 7-1/2 year low on UK
banking sector concerns, while the view that the euro zone will
suffer a deep recession pushed the euro to a six-week low.
The dollar hit its strongest level against a currency basket
since early December, with market participants also saying that
euphoria ahead of Barack Obama's inauguration as U.S. president
had increased short-term demand for the U.S. currency.
Sterling fell roughly 3.5 percent against the dollar and was
on track to post its biggest drop since 1992 as it continued to
take a beating after the Royal Bank of Scotland <RBS.L> on
Monday announced the biggest losses in UK corporate history.
"Sterling is falling on a continuation of banking sector
concerns from yesterday," said Marco Annunziata, global chief
economist and head of currencies at Unicredit in London.
"Further deterioration in UK banks will require more
government funding," he said, adding that this was driving the
sell-off in sterling.
Escalating concerns that more euro zone nations may face
credit ratings downgrades stung the euro, and analysts said a
bigger-than-expected improvement in the German ZEW economic
sentiment survey failed to lift demand.
By 1216 GMT sterling <GBP=D4> had fallen as low as $1.3915,
its weakest since mid-2001. Against the yen it hit a record low
of 125.62 yen <GBPJPY=R>.
A smaller-than-forecast fall in UK inflation data for
December initially helped to stem the UK currency's sharp fall,
but analysts expected more losses as New York traders entered
the market.
The euro <EUR=> traded 1 percent lower at $1.2977, having
tumbled as low as $1.2923 in early trade according to Reuters
data, its weakest since early December.
The European currency drew little cheer from the ZEW
institute's announcement that its German economic sentiment
index improved to -31.0 in December from -45.2 [].
Concerns about the health of the euro zone economy remained
rampant after the European Commission on Monday forecast a 1.9
percentage shrinkage in the economy in 2009 and Standard &
Poor's downgraded Spain's credit rating.
Analysts said that investors are concerned that the European
Central Bank will have to cut interest rates further after their
50 basis point reduction to 2.0 percent last week in order to
stave off a deep recession in the single currency bloc.
"Selling the pound and the euro against the dollar and the
yen proves to be the trade of least resistance," said Ashraf
Laidi, strategist at CMC Markets.
INAUGURATION BOOST
The declines in the pound and the euro helped push the
dollar to a six-week high against a basket of currencies of
86.104 <.DXY>, while optimism that the U.S. economy will improve
under the Obama Administration was also helping the dollar.
"There are hopes that a change in the U.S. administration
will bring about a turnaround in the economy, even though this
won't happen overnight," said Annunziata at Unicredit.
"The inauguration is crystallising all expectations that the
U.S. economy will be the first to recover from the recession
The low-yielding yen also gained as global recession worries
prompted investors to dump high-risk assets. The dollar dipped
0.4 percent to 90.30 yen <JPY=>, while the euro and the New
Zealand dollar fell roughly around 1.4 percent against the
low-yielding Japanese currency.
UK inflation data showed CPI dropping to 3.1 percent in
December from 4.1 percent in November [].
This is the steepest price drop since April 1992, but the
headline reading was above forecasts for 2.7 percent.
Britain threw another lifeline to banks on Monday, offering
guarantees on their debt and setting up a 50 billion pound fund
to buy up assets and get cash flowing again, in a first step
towards unconventional quantatitive easing.
The Bank of England cut interest rates to a historic low of
1.5 percent this month, and analysts see more cuts in the coming
months as the economic slowdown shows no sign of abating.
The Bank of Canada is expected to cut rates by 50 basis
points to a 50-year low of 1.00 percent later in the day.
(Additional reporting by Jessica Mortimer)
