RTRS: FOREX-Euro, sterling trim losses as shares rise
* Euro, sterling trim losses as stocks rise
* Stocks rise as Barclays, ING drive rally in banks
* Euro down 0.3 pct at $1.2949 , stg up 0.1 pct vs dlr
* Euro, pound still pressured by bank sector concerns
(Adds quote, updates prices)
By Tamawa Desai
LONDON, Jan 26 (Reuters) - The euro and sterling trimmed early losses on Monday as a rally in bank shares bolstered European equity markets, but concerns over the global downturn and banking sector woes kept investors cautious.
The pound and the euro got a slight reprieve after taking a beating last week when sterling fell to 23-year lows against the dollar and the euro hit six-week lows against the dollar.
European shares were up 1.3 percent by mid-morning trade, powered by Dutch financial group ING (ING.AS: Quote, Profile, Research), which said it would tap into government guarantees, and Barclays Plc (BARC.L: Quote, Profile, Research) which said it did not need fresh funding. [.EU]
"Sterling backed up a little bit on support from financials as we finally saw some positive news from the banks," said Ian Stannard, senior currency strategist at BNP Paribas.
"But the financial sector rebound may be quite short-lived as the fundamental problems still remain," he added.
By 1030 GMT the euro was down 0.3 percent at $1.2949 after reaching a session low of $1.2862. Against the yen it was up 0.3 percent at 115.72 yen , reversing early losses. The single currency hit a seven-year trough of 112.08 yen last week.
Sterling was up 0.1 percent at $1.3829 after hitting a session low of $1.3548. The pound fell to a low of $1.3500 on Friday after data showed the UK economy fell into recession for the first time in nearly 20 years.
Earlier, sterling was pressured after Bank of England Monetary Policy Committee member David Blanchflower was quoted on Sunday as saying British interest rates still had a way to go if they were to follow the United States. [ID:nLO542246]
Key US rates are now targeted in a range of zero to 0.25 percent. British rates are at 1.5 percent.
"The prospect of lower UK rates is one of the key drivers helping to undermine the pound," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
In contrast, euro zone policymakers seemed averse to taking further monetary easing steps.
European Central Bank governing council member Yves Mersch said he would be unwilling to see the bank's main interest rate fall much lower than the current 2 percent and it would be difficult to take so-called quantitative easing steps. He was speaking in an interview with the Financial Times published on Monday. [ID:nLQ61697]
BNP's Stannard said the euro may come under further pressure against sterling as a global economic slowdown will hurt the euro zone economy but policymakers remain reluctant to act.
"The market has yet to adjust to a more severe slowdown in the euro zone," he said, adding widening credit spreads in the euro zone would also hamper the single currency.
The euro was down 0.4 percent at 93.65 pence. .
Meanwhile, the dollar rose 0.6 percent to 89.35 yen as dealers trimmed short dollar positions against the yen ahead of the United States Federal Reserve's two-day policy meeting ending Wednesday.
With rates already near zero, traders will watch what assets the Fed may purchase to ease credit strains, analysts said.
The dollar was also supported on expectations for further steps by the Obama administration to bolster the banking system.
Lawrence Summers, head of the National Economic Council and President Barack Obama's top economic adviser, said on Sunday that more money may be needed to stabilise the financial system. [ID:nN25339491]
