By Stanley White
July 18 (Bloomberg) -- The British pound fell against the dollar on speculation the U.K. government will increase borrowing as Chancellor of the Exchequer Alistair Darling introduces a new set of spending guidelines.
The U.K. currency declined versus the euro for the first day this week after the Financial Times reported, without citing sources, that the new framework would allow for the breaking of limits on public-sector debt. A Treasury spokesman said that this was ``pure speculation.''
``There's sterling selling on the back of this report and it looks like it will continue,'' said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney, referring to another term for the pound. ``The fact that the Treasury would go this far shows that times are desperate and the economy must be in a pretty poor state.''
The pound fell to $1.9972 at 1:08 p.m. in Tokyo from $2.0038 late yesterday in New York. Sterling rose to $2.0157 on July 15, the highest in almost four months. Against the euro, it declined to 79.33 pence from 79.16 pence. The pound may weaken to $1.9800 in the next few days, Callow forecast.
Government borrowing is on course to exceed the existing plan's limit of 40 percent of gross domestic product, the FT reported.
Darling's current rules call for a balanced budget over the course of the economic cycle, though there isn't yet agreement on the length of that period. Treasury officials are waiting for the Office for National Statistics to deliver its annual revisions to economic growth estimates in September, which will help show when the current economic cycle ends.
Final Nail
``If this is true, it puts the final nail in the coffin of U.K. Prime Minister Gordon Brown's reputation for economic competence,'' the opposition Conservative Party said in a statement. ``He repeatedly staked that reputation on his fiscal rules.''
Later today, the Treasury will report a deficit of 7.4 billion pounds ($14.8 billion) for June, more than the 6.36 billion pound shortfall in the same month a year ago, according to a survey of 17 economists by Bloomberg News. The statistics office will release the data at 9:30 a.m. in London.
The pound also weakened on speculation a housing slowdown and credit-market losses in the financial sector will push the U.K. economy into a recession.
Claims for jobless benefits rose 15,500 in June from a month earlier, the most since the aftermath of the last recession in 1992, the Office for National Statistics said yesterday.
U.K. Economy
Homebuilders announced more than 4,000 job cuts since the start of July. HBOS Plc, the U.K.'s biggest mortgage lender, said last week that house prices fell in June from a year earlier by the most since 1992.
The collapse of the U.S. subprime mortgage market has cost financial institutions worldwide about $436 billion in losses and writedowns and led them to shed almost 94,000 staff.
``We're bearish on the pound,'' said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. ``We expect the U.K. economy to go into a recession. It's a combination of the housing market and financial market stress.''
The pound may decline to $1.7700 by the end of September 2009, he said.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net
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