The British pound rebounded on Tuesday as fears faded that the departure of two ministers would prompt an immediate challenge to Prime Minister Theresa May’s leadership, while the yen fell against the dollar as investors bid up riskier assets.
Sterling turned positive on the day and rose to $1.3272 , having fallen to as low as $1.3189 on Monday, after Mrs May's foreign minister and Brexit negotiator quit in protest at her plans to keep close trade ties with the European Union.
Conservative lawmakers said Mrs May is likely safe from a leadership challenge despite the resignations and that helped the beleaguered currency regain some ground.
Still, the departures undermined Mrs May’s own proclamation of cabinet unity last Friday.
"The market is worried that yesterday's resignations could be a sign of major instability within the British government. However, we see little indication of that and assume May will survive and restart negotiations with Brussels. sterling should correct its losses," said Commerzbank FX analyst Esther Maria Reichelt.
Markets still expect the Bank of England to hike rates at its next policy meeting on August 2nd, but analysts warn a full-blown political crisis could dent those expectations.
The pound strengthened against the euro to 88.60 pence, and at 0730 GMT was up 0.1 per cent, after hitting a four-month low of 89.025 pence per euro on Monday.
Elsewhere currency markets were broadly risk positive as investors focused on decent economic data and appeared to shrug off concerns about U.S.-China trade tensions.
Numbers showing a healthy rise in German exports have also buoyed the mood.
The dollar rose 0.2 per cent against the Japanese yen, a currency usually bought during times of political uncertainty, to 111.08 yen, above the 111-yen handle for the first time since Tuesday last week and approaching a six-month high.
The dollar’s index against a basket of six major currencies rose to 94.230 after falling on Monday to 93.711 , its lowest since mid-June.
The dollar was not helped by Friday’s data showing US wage growth remained tame despite a tight labour market.
The yuan rose 0.1 per cent in offshore markets to 6.6262 against the dollar, further away from the lows hit in June - its biggest ever monthly fall.
“It seems the market has digested the potential negative outcome stemming from the US-China trade war, although I am not sure the market has really priced in the worst scenario,” said Mizuho Securities’ Yamamoto.
The Chinese currency gained last week on the back of a stronger midpoint fixing and after data showed China’s foreign exchange reserves rising in June.
Turkey’s lira on Tuesday made up some of the previous day’s losses, trading one percent higher at $4.6890.
The currency had hit as low as $4.7506 after President Tayyip Erdogan on Monday named his son-in-law as Treasury and Finance minister in the new cabinet. – Reuters
