LONDON, July 11 (Reuters) - Sterling hit its highest level in 26 years versus a broadly falling dollar on Wednesday, with the greenback hurt by concerns about the U.S. high-risk mortgage sector and possible implications for its wider economy. The dollar came under pressure on all fronts, hitting a record low against the euro and a one-month trough versus the yen after credit rating agency Standard & Poor's warned on Tuesday it might downgrade $12.1 billion in debt related to subprime mortgages, which cater for borrowers with a poor credit history.
"This move is very much a weak dollar story due to the subprime issue, which is allowing sterling to take advantage and continue to push higher, but sterling is also picking up some independent support and I would expect that to continue," BNP Paribas senior currency strategist Ian Stannard said.
"We've been looking for a move up into the $2.03/2.04 area in coming weeks but it looks like we might hit that target much earlier," he added.
By 0744 GMT, sterling had risen as high as $2.0293, according to Reuters data -- a 26-year peak.
Sterling has seen strong independent support as a higher-yielding currency as the Bank of England has boosted UK borrowing costs five times since last August to help combat inflation.
With UK interest rates now at 5.75 percent, the pound has been a popular target currency in carry trades where investors borrow cheaply in low-yielding currencies like the yen to fund purchases of higher return assets.
Analysts said however that if the U.S. subprime problem spilled over significantly into the wider economy and hurt appetite for risk then sterling could be vulnerable.
"At the moment the subprime factor is being seen as a U.S. issue, but as soon as we start to see spillover effects into broader liquidity issues then we'll see sterling start to come under pressure. That hasn't happened yet but it's something that needs to be watched," BNP's Stannard said.
Source supplied by: Reuters
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