Yen Rises Toward Record High Against Pound on U.K. Bank Concern

By Ron Harui

Jan. 22 (Bloomberg) -- The yen rose toward a record high against the pound as speculation the deepening financial crisis will force the U.K. government to nationalize banks boosted the appeal of Japan’s currency.

Sterling also approached a 23-year low versus the dollar before a U.K. government report tomorrow that may show the economy shrank the most since 1990 last quarter, supporting the case for the Bank of England to cut interest rates next month. The euro dropped to near the weakest in more than six years against the yen before a French report that may indicate consumer spending fell in December, damping appetite for higher- yielding assets.

“The market dynamics suggest that the pound’s sell-off is going to continue,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. “The U.K. economy is a basket case. We’re seeing the yen benefit from the fundamental side of things.”

The yen rose to 123.24 per pound as of 10:37 a.m. in Tokyo from 124.88 late in New York yesterday when it reached an all- time high of 119.42. Japan’s currency climbed to 115.11 per euro from 116.54 yesterday when it touched 112.12, the strongest since March 2002. The yen rose to 88.83 per dollar from 89.49 yesterday when it reached 87.13, the highest since July 1995.

The pound fell to $1.3875 from $1.3955 in New York yesterday, when it reached $1.3622, the lowest since September 1985. Against the euro, the pound declined to 93.40 pence from 93.27 pence yesterday, when it touched 94.30 pence, the weakest since Jan. 5.

Financial Crisis

Sterling lost 3.7 percent versus the dollar and 3.1 percent against the euro this week as the U.K. government’s plan for a second bank bailout in three months raised concern the financial crisis is deepening. Shares of Barclays Plc fell for a seventh day yesterday on concern the bank will take more writedowns and be nationalized.

The U.K.’s gross domestic product probably contracted 1.2 percent in the fourth quarter from the prior three months, according to a Bloomberg News survey of economists before tomorrow’s report from the Office for National Statistics.

The Bank of England will lower its benchmark rate by a half-percentage point to 1 percent at its Feb. 5 meeting, a separate Bloomberg survey shows.

Gains in the yen may be tempered on speculation Japanese officials will signal they may intervene in the foreign-exchange market for the first time in five years.

Finance Minister Shoichi Nakagawa said Jan. 13 that abrupt movements in currencies “aren’t good.”

‘Really Hurting’

“The yen at current levels is really hurting Japan’s business,” John Richards, head debt market strategist for the Asia-Pacific region at Royal Bank of Scotland Plc in Tokyo, said in an interview with Bloomberg Television. “Exchange-rate intervention might be the last arrow in their quiver.”

The last time Japan intervened in the currency markets on its own, it sold a record 20.4 trillion yen ($230 billion) in 2003 and 14.8 trillion yen in the first quarter of 2004. Central banks buy or sell currencies when they seek to influence exchange rates.

Timothy Geithner, U.S. President Barack Obama’s nominee for Treasury Secretary, said at his confirmation hearing yesterday that it’s important for America’s biggest trading partners to refrain from setting or manipulating exchange rates.

The euro approached a six-week low against the dollar on speculation the French government will say consumer spending dropped in December for the second time in three months.

“The euro-area economy is in the doldrums and may deteriorate further,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The bias for the euro is to the downside.”

Europe’s single currency may weaken to $1.2913 and 114 yen today, Soma said.

Spending by consumers, which accounts for about 15 percent of France’s economy, fell 0.2 percent in December from the previous month, according to a Bloomberg News survey of economists. Insee, the national statistics office, will release the report at 8:45 a.m. in Paris.

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