Sterling holds steady as investors weigh UK fiscal risk

By Canan Sevgili

LONDON (Reuters) -The pound held steady against the dollar on Thursday, as investors weighed up concerns about Britian's finances, in light of weaker demand at a UK government bond auction.

Sterling was flat at $1.34495 around midday in London.

It was steady against the euro, which traded at 87.36 pence. 

The UK Debt Management Office sold 1.25 billion pounds ($1.68 billion) of 4.5% 2034 gilts via tender on Thursday, with a bid-to-cover ratio of 2.90 and an average yield of 4.584%. July's 1.5 billion pound sale of this bond drew a cover ratio of 3.32 and an average yield of 4.553%, signaling investor demand has softened.

"The drop in gilt demand highlights investor impatience with uncertainty and could keep markets volatile until the budget," Lale Akoner, global market analyst at eToro, said.

Akoner said that the budget will need to deliver credible fiscal tightening, otherwise the UK risks testing investor confidence further, which could push up the government's long-term borrowing costs if investors decide to sell their holdings of gilts.

British finance minister Rachel Reeves is seeking a balance between raising taxes and supporting growth in her November 26 budget. She has been under growing pressure to keep the UK's finances on track, while sticking to her own fiscal rules.

UK gilt yields are among the highest in developed economies. The 10-year gilt is currently around 4.695%, compared with 4.146% for U.S. debt and 2.74% for 10-year German Bunds.

Piotr Matys, senior FX analyst at InTouch Capital Markets, said that if sterling ends the week well below the $1.35 level, it could trigger a further downward retracement, as the dollar regains its status as the "'cleanest dirty shirt' in G10 currencies amid persistent UK public finance concerns."

($1 = 0.7433 pounds)

(Reporting by Canan Sevgili; Editing by Amanda Cooper and Ronojoy Mazumdar)