LONDON, Oct. 16 (Reuters) - Sterling fell broadly on Tuesday as risk appetite dipped, causing investors to sell the high-yielding pound as they exited carry trades.
The pound -- which has the highest interest rates in the Group of Seven nations at 5.75 percent -- benefits from the carry trade where investors borrow low yielding currencies such as the yen to fund purchases of higher yielding assets.
But falling global stock markets pointed to a pull-back in risk appetite, causing investors to sell sterling.
"It's a carry trade unwind. The yen has risen sharply and as sterling is a major carry currency, it suffers more than most," said Lee Ferridge, senior proprietary trader at Rabobank.
By 0735 GMT the pound was down 1 percent against the yen to 237.33 yen <GBPJPY=R>.
It was down 0.4 percent versus the dollar at $2.0346. The euro was up 0.1 percent at 69.59 pence <EURGBP=>.
Investors will look to CPI data for September at 0830 GMT for further clues on the outlook for UK interest rates.
Analysts polled by Reuters forecast a 0.2 percent increase on the month, bringing the yearly rise to 1.9 percent, up from 1.8 percent previously.
Minutes of the Bank of England's Monetary Policy Committee October decision on interest rates are released on Wednesday and analysts said the inflation data may give investors a steer on how the voting went.
"A soft reading might increase the chances of tomorrow's MPC minutes showing a dissenting vote, and so put sterling on the defensive footing as a result," Calyon said in a note to clients.
The Reuters consensus shows a unanimous 9-0 vote for holding rates this month, though a number of economists are expecting one or even two dissenting votes for a rate cut.
Source supplied by: Reuters
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