Pound Falls Against Dollar on Concern Spending Plan Will Fail

By Anchalee Worrachate

Nov. 25 (Bloomberg) -- The pound dropped against the dollar as investors remained skeptical government plans to resuscitate the U.K. economy by boosting spending will work.

The British currency snapped a two-day gain versus the dollar today after Prime Minister Gordon Brown’s government yesterday proposed a tax and spending package that will cost 25.6 billion pounds ($38.6 billion) and create the largest deficit among the Group of Seven industrialized nations. House prices slid in November, a report this week may show.

“The principle concern about the budget is whether it would work,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. “You’ve got the asset-price boom that collapsed, leaving a huge amount of debt that is far greater in the U.K. proportionately than anywhere else. This is not the time to buy sterling.”

The pound declined to $1.5107 as of 7:43 a.m. in London, from $1.5183 yesterday. Against the euro, the U.K. currency strengthened to 85.19 pence, from 85.32 pence.

The government will issue 146.4 billion pounds of bonds, the London-based Debt Management Office said yesterday after Chancellor of the Exchequer Alistair Darling’s pre-budget report to Parliament. That’s an 83 percent increase from the 80 billion pounds the government originally planned in March. The median forecast of 11 banks that deal directly with the Treasury and surveyed by Bloomberg was 138.1 billion pounds.

U.K. 10-year government bonds, or gilts, rose, with the yield on the two-year note falling two basis points to 3.91 percent as of 8:10 a.m. in London. The price of the 5 percent due March 2018 climbed 0.18, or 1.8 pounds per 1,000 pound ($1,514) face amount, to 108.40.

Housing Report

The Bank of England signaled last week it’s prepared to cut borrowing costs further to buoy the economy. Policy makers lowered the main interest rate 150 basis points on Nov. 6 to 3 percent, the lowest level since 1955. They will reduce the rate a further 75 basis points at the next meeting, according to a Credit Suisse Group AG index of probability based on overnight index-swap rates.

House prices probably fell more than 15 percent in November from a year earlier, according to the median forecast of 15 economists surveyed by Bloomberg before a report from the Nationwide Building Society this week.

The pound may gain more than 10 percent against the dollar, Citigroup Inc. said, citing charts used to predict currency movements. A rally from near the 76.4 percent Fibonacci retracement of the pound’s climb from $1.4557 to $1.5249 between Nov. 13 and 19 may indicate “daily momentum is turning up,” New York-based Tom Fitzpatrick and London-based Shyam Devani wrote in a report dated Nov. 24. Investors should target a gain in the pound to $1.5950 and possibly to $1.67, and exit the trade if the currency weakens to $1.4698, they said.

The currency lost almost 45 percent against the Japanese yen since June as the financial crisis prompted investors to shun higher-yielding currencies. It fell 8 percent against the euro during the same period.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net