By Ye Xie and Lukanyo Mnyanda
Jan. 20 (Bloomberg) -- The pound dropped to a record low against the yen and breached $1.40 for the first time since 2001 as the U.K.’s second bank bailout in three months raised concern the financial crisis is deepening.
Sterling had its biggest drop against the euro in a month on Prime Minister Gordon Brown’s plan to support U.K. banks and boost the government’s stake in Royal Bank of Scotland Group Plc. The euro fell below $1.30 for the first time since Dec. 10 on concern European banking losses will deepen.
“The currency market is telling us that there’s risk for a debt crisis in the U.K.,” said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. “The U.K. and Europe need more capital injection into the banking system. Until that happens, money flows back to the U.S.”
The pound slid 3.5 percent to 126.18 yen at 9:14 a.m. in New York, from 130.71 yesterday, after touching the all-time low of 125.25. It weakened 3.3 percent to $1.3939 from $1.4420, after reaching $1.3863, the lowest level since June 2001. The U.K. currency will weaken to $1.30 in the next few months, according to Germanier. Against the euro, the pound weakened as much as 2.8 percent to 93.25 pence per euro, from 90.60, the biggest intraday decline since Dec. 18. It depreciated to a record of 98.03 on Dec. 30.
Japan’s yen strengthened to 117.06 per euro from 118.47, and 90.26 per dollar from 90.64.
The FTSE 100 Index gained 0.3 percent as the pound’s decline buoyed exporters such as GlaxoSmithKline, Europe’s largest drugmaker, and Vodafone Group Plc, the world’s biggest mobile-phone company.”
Financial Services
Financial services account for almost 30 percent of the U.K. economy, according to data from the Office for National Statistics. Manufacturing accounts for 14 percent.
Yesterday’s 50 billion pound British government package to stabilize the financial industry followed October’s 50 billion- pound bank recapitalization program. U.K. debt may now be greater than the government forecast on Nov. 24, said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, which cut the June forecast for the pound today to $1.50 from $1.60.
“I would urge you to sell any sterling you might have,” Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television. “It’s finished. I hate to say it, but I would not put any money in the U.K.”
The pound weakened versus all of the 16 most-active currencies as a government report showed the inflation rate fell in December to the lowest level since April, giving the Bank of England more room to cut interest rates. U.K. consumer prices rose 3.1 percent from a year earlier, the Office for National Statistics said today. Inflation is tumbling as the U.K.’s first recession in 17 years curbs price increases.
Brown’s Leadership
Worsening economic indicators have stoked concern among voters about Brown’s leadership, both as prime minister since Tony Blair stepped down in 2007 and as finance minister for a decade before. An Ipsos-Mori survey today showed the opposition Conservative Party 14 points ahead of Brown’s Labour Party. An election is due by June 2010.
“The realization that the banking sector is in an even worse state than previously thought, and the significance of that sector to the U.K. economy, is really hurting the pound,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International.
The Bank of England reduced its benchmark rate to 1.5 percent this month, the lowest in the bank’s history. Policy makers will probably cut the rate to 1 percent at their Feb. 5 meeting, according to a separate Bloomberg survey.
Trade Surpluses
At a time when interest-rates are sinking toward zero around the world, the biggest currency traders are recommending countries that have the largest trade surpluses, led by Japan, Norway and Switzerland.
BNP Paribas SA, the best currency forecaster in a 2007 Bloomberg survey, says the yen will strengthen about 14 percent against the dollar by June. Goldman Sachs Group Inc. made Norway’s krone one of its top 2009 picks, with possible gains of 17 percent versus the dollar. Bank of America Corp., the largest U.S. lender by assets, says the Swiss franc will advance against every major currency.
Europe’s single currency declined for a second day versus the yen after the Brussels-based European Commission said yesterday the region’s economy will probably shrink 1.9 percent in 2009 and grow 0.4 percent next year.
“We still believe that these estimates are likely to be surprised on the downside,” analysts led by Hans-Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas in London, wrote in a research note yesterday. “We expect the euro to remain under pressure.” The euro will decline to $1.20 and to 94 yen by the end of June, BNP Paribas forecast.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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