U.K. Pound Falls Against Dollar on U.S. Plan to Avert Collapse

By Lukanyo Mnyanda and Andrew MacAskill

Sept. 19 (Bloomberg) -- The U.K. pound fell against the dollar as U.S. government plans to take tainted assets off banks' balance sheets boosted demand for the U.S. currency.

The pound also climbed versus the yen as investors bought higher-yielding assets after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke pledged a ``comprehensive approach'' to revive the market for mortgage- related debt. The government today announced a $50 billion program to insure the holdings of money-market mutual funds for a year.

``Sterling is caught up in a logjam here. To a large extent it's a dollar story,'' Gerry Celaya, chief strategist at RedTower Inc. in Aberdeen, said in a Bloomberg Television interview. ``The risk is that the pound will languish'' around $1.80 and then decline to $1.75.

The British currency dropped as much as 1.5 percent to $1.7917 and was at $1.8077 by 1:48 p.m. in London, from $1.8181 yesterday, when it traded at the highest level since Aug. 29. Against the euro, the pound was at 79.07 pence, from 78.92 yesterday and 79.32 a week ago. It gained 1.8 percent to 195.09 yen, the highest level since Sept. 8.

The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, was little changed at 87.55, according to Deutsche Bank AG. The measure is down 7.5 percent this year.

Recession Threat

The U.K. currency dropped as mounting evidence the second- largest economy in Europe is headed for a recession prompted investors to increase bets on lower interest rates. The odds on the Bank of England cutting them at its next policy meeting were 45 percent, from 28 percent a week ago, according to a Credit Suisse derivatives index.

The drop in Britain's house prices will be ``painful'' for many households, the central bank's Chief Economist Spencer Dale told business leaders in Dover, southern England, yesterday.

``The prospect of the Bank of England cutting as early as October suggests playing shorts is attractive,'' Divyang Shah, chief strategist in London at CBA Europe Ltd., a unit of Commonwealth Bank of Australia, wrote in a note to clients.

Paulson and Bernanke late yesterday proposed moving troubled assets from the balance sheets of American financial companies into a new institution. The world's major central banks also pumped $247 billion into the money markets in an attempt to stabilize the financial system.

A deepening credit crunch sparked by the implosion of Lehman Brothers Holdings Inc. fueled concern that U.S. securities firms wouldn't be able to fund themselves.

Bank of England policy makers kept the benchmark interest rate at 5 percent on Sept. 4, as they weighed the risk of accelerating inflation with the danger that mounting bank losses will drive the economy into a recession.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net