By Ritvik Carvalho
LONDON (Reuters) - Sterling fell to its lowest in a week against the dollar and traded near one-week lows against the euro on Tuesday as more subdued risk sentiment across broader asset markets weighed on the currency.
Broader equity markets as measured by MSCI's All Country World Index and Wall Street futures were lower on Tuesday, giving the dollar a lift, while riskier currencies pulled back.
Expectations of a large U.S. fiscal stimulus package from U.S. President Joe Biden's administration has fuelled risk sentiment in markets in recent weeks, benefiting the pound, which has hit 2-1/2 year highs against a weakened dollar.
Sterling has also hit its highest against the euro since May 2020 last week, with analysts attributing the pound's gains to a slower COVID-19 vaccine rollout in the European Union than in Britain.
But barring a jump in European stocks, a pullback in broader risk sentiment on Tuesday outweighed the lack of a negative surprise from UK labour market data and pushed the pound lower.
Data on Tuesday showed Britain's unemployment rate hit its highest in nearly five years in the three months to November when coronavirus cases began to rise for a second time and most of the country returned to a partial lockdown.
Redundancies touched a record high, taking the unemployment rate to 5.0%, its highest since mid-2016, according to official data, although the increase was slightly weaker than economists' forecasts.
By 0910 GMT, sterling was down 0.2% against the dollar at $1.3644 and 0.05% lower to the euro at 88.88 pence. It earlier fell to $1.3610, its lowest against the dollar in a week.
"It's a function of the broader risk dynamic so I think sterling is still trading rather more on risk orientation than it is the domestic fundamental story," said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, adding that the market was not overtly concerned with the labour market data.
"That is the overarching issue with obviously equity sentiment looking far less robust, with question marks raised about the process of the U.S. stimulus package."