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

By Andrew MacAskill and Lukanyo Mnyanda

Sept. 19 (Bloomberg) -- The U.K. pound fell against the dollar as the U.S. government began working on plans to take troubled assets off banks in an attempt to calm global financial markets.

The pound snapped a two-day advance versus its U.S. counterpart and dropped for a second day against the euro as Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke pledged a ``comprehensive approach'' to revive the market for mortgage-related debt. Britain's currency climbed to a four-day high versus the yen as investors bought higher-yielding assets funded by loans in the Japanese currency.

``Like other currencies, we expect volatility to remain dominant, especially considering the exposure of the U.K. economy to the fortunes of the financial services industry,'' said Geoffrey Yu, a currency strategist in London at UBS AG, the second-biggest foreign-exchange trading bank.

The British currency traded at $1.8026 by 8:07 a.m. in London, from $1.8181 yesterday and $1.7942 on Sept. 12. Against the euro, the pound advanced at 78.90 pence, from 78.92 yesterday and 79.32 a week ago. It gained to 192.84 yen, from 191.70, after rising to 193.26, the highest level since Sept. 15.

The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, was little changed at 87.54, according to Deutsche Bank AG. The measure is down 7.5 percent this year.

Treasury Secretary Paulson and Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution.

Extra Liquidity

The world's major central banks yesterday 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 about U.S. securities firms' abilities to fund themselves.

Bank of England policy makers kept interest rates at 5 percent on Sept. 4, as they weighed the risk of accelerating inflation with the danger that mounting bank losses will push Europe's second-biggest economy into a recession.

U.K. government bonds fell, with the yield on the two-year gilt rising 12 basis points to 4.27 percent, leaving it 25 basis points lower in the week. The 4.75 percent security due June 2010 declined 0.21, or 2.1 pounds per 1,000-pound ($1,802) face amount, to 100.79.

The yield on the 10-year gilt rose 12 basis points to 4.54 percent, with the difference, or spread, over two-year notes at 27 basis points. Bond yields move inversely to prices.

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