Pound Falls on Concern U.K., Iceland Assets Row May Escalate

By Ron Harui

Oct. 10 (Bloomberg) -- The pound dropped to the lowest level against the dollar in almost five years on concern a dispute between the U.K. and Iceland over financial assets in each other's countries will escalate.

The currency headed for a second weekly decline after Prime Minister Gordon Brown said yesterday the U.K. may freeze the assets of Icelandic companies. The two nations are tussling over who should compensate British savers with money locked in accounts at Kaupthing Bank hf and Landsbanki Islands hf after Iceland's banking system collapsed.

``There are some worries over the U.K.'s exposure to Iceland,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. ``The British have put money into Iceland's banks and they are not able to access that.''

The pound declined to $1.6922 as of 1:27 p.m. in Tokyo from $1.7097 late in New York yesterday. It earlier reached 1.6902, the weakest since November 2003. The British currency also fell to 79.94 pence per euro from 79.57 pence.

Brown said Iceland is failing to honor its guarantee to cover overseas savers on accounts that it usually backs up to 20,887 euros ($28,400), leaving Britain to pick up the tab. Iceland's Prime Minister Geir Haarde said the U.K. government is to blame for triggering the crisis when it used anti-terrorism laws to seize the assets of Icelandic banks in the U.K.

Britain's currency also fell against the yen, headed for its largest weekly drop in a decade, on speculation a global stock-market rout will spur investors to reduce holdings of higher-yielding assets funded in Japan.

Japan's Nikkei 225 Stock Average dropped below 9,000 for the first time since June 2003. Group of Seven finance ministers and central bankers meet today and tomorrow in Washington to discuss financial turmoil that has wiped more than $8 trillion off the value of global stocks this month.

Traders stepped up bets the Bank of England will reduce its benchmark interest rate further after cutting it by half a point to 4.5 percent this week. The implied yield on the March short- sterling futures contract was at 4.145 percent yesterday, compared with 4.68 percent a week earlier.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net