Goldman Sachs Says U.K. Is No ‘Reykjavik-on-Thames’

By Matthew Brown and Gavin Finch

Feb. 3 (Bloomberg) -- Investors should be wary of betting the U.K. will have a currency crisis similar to that experienced in Iceland, according to Jim O’Neill, chief economist at Goldman Sachs Group Inc.

“The pound is very cheap for the first time in our professional history,” O’Neill said today at a foreign-exchange seminar in London. “You need to make sure that the U.K. is Reykjavik-on-Thames before you bet against the pound.”

Iceland’s krona slid 46 percent against the euro last year after the collapse of the banking system prompted investors to pull their holdings and forced the government to seek an International Monetary Fund bailout. The pound tumbled 23 percent versus Europe’s single currency over the same period. It’s 6 percent higher against the euro this year.

The pound will strengthen to 81 pence per euro in three months and climb to 78 pence per euro within 12 months, Goldman forecast. Against the dollar, it will rally to $1.60 in three months and $1.86 in 12 months, according to Goldman.

Much of the weakness of the U.K. economy and banking system has already been priced into the value of the pound, Goldman analysts including O’Neill said in December. The dollar will weaken against the pound as the U.S. trade deficit fails to shrink and the Federal Reserve buys Treasuries, stoking concern inflation will rise, they said.

The U.K. currency fell to 90.24 pence per euro as of 12:40 p.m. in London, from 90.03 yesterday, and was little changed at $1.4230.

The median estimate of 46 strategists surveyed by Bloomberg is for the U.K. currency to trade at $1.43 by the end of June, and $1.52 by Dec. 31.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net