Pound Weakens on Newspaper Report That U.K. Debt Rating at Risk

By Yasuhiko Seki and Ron Harui

April 24 (Bloomberg) -- The pound fell against the dollar and the yen after the Daily Telegraph said Moody’s Investors Service and Standard & Poor’s are reviewing the U.K.’s AAA credit rating on concern about the nation’s rising debt burden.

The dollar weakened against the yen, heading for a third weekly loss before a U.S. government report economists say will show orders for durable goods fell for the fifth time in six months, damping demand for the nation’s assets. The euro is set for a weekly gain against the greenback on speculation German business confidence rebounded in April, adding to signs the worst of Europe’s economic slump may be over.

“Fiscal conditions in the U.K. are deteriorating while interest rates are falling, weakening the allure of the pound,” said Nobuaki Kubo, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of New York-based Brown Brothers Harriman & Co. The newspaper report “further reduced the attractiveness of the currency,” he said.

The pound fell to $1.4673 as of 11:22 a.m. in Tokyo from $1.4722 in New York yesterday. The British currency dropped to 142.75 yen from 144.21. The euro weakened to 127.98 yen from 128.77 yesterday, and traded at $1.3154 from $1.3144. The yen strengthened to 97.22 per dollar, the highest level since March 30, from 97.96 yesterday.

The U.K. may lose its top sovereign credit rating after the government said the nation’s debt will reach 1.4 trillion pounds ($2.1 trillion) over the next five years, the London-based Daily Telegraph reported. The pound slumped 1.2 percent on April 22 when Chancellor of the Exchequer Alistair Darling announced the biggest budget deficit on record.

‘Cause for Concern’

Moody’s analyst Arnaud Mares said Treasury projections for public-sector net borrowing are “a cause for concern,” while a Standard & Poor spokesman said it was looking at details of the budget and had no comment at this time, the newspaper said.

Standard & Poor’s cut Ireland’s credit rating to AA+ from AAA last month as the global financial turmoil fueled borrowing costs and swelled the budget deficit. The agency lowered the ratings of Spain, Portugal and Greece in January. Moody’s placed Ireland’s Aaa-rated government bonds on review for a possible downgrade on April 17, citing the “severe economic adjustment taking place” in the nation.

“It’s a veiled threat from Moody’s,” said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney. “Given that we are still above where we were 24 hours ago you would hardly be shocked if the pound headed back to the low 1.45s against the dollar.”

Europe Hopes

The euro pared earlier losses against the dollar before a German report that may show business confidence climbed to 82.3 in April from a 26-year low of 82.1 in March, according to a Bloomberg New survey of economists. The Ifo institute will release the survey in Munich today.

“Hopes are emerging that the euro-zone recession is waning, given the recent data,” said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France’s third- largest bank. “This is positive for the euro.” Europe’s currency may strengthen to $1.3230 and 129.00 yen today, he said.

The 16-nation currency gained yesterday after Credit Suisse Group AG said it returned to profit and an index showed European services and factory industries shrank in April at the slowest pace in six months.

Stress Tests

Japan’s currency headed for a second weekly advance versus Australia’s dollar on concern that U.S. banks will unveil additional loan losses, spurring investors to pare holdings of higher-yielding assets.

The yen rose against 15 of the 16 most-active currencies this week on speculation the U.S. government will direct banks judged short of capital to say how they will raise extra funds. U.S. lenders may need another $1 trillion in capital to cushion losses, KBW Inc. analysts said yesterday. The estimate is based on KBW’s own “stress test” of the strength of top U.S. lenders, wrote analysts led by Frederick Cannon in San Francisco.

“Any unexpected banking losses that come out of these tests would be worrying,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “This would likely cause buying of the yen as investors shun risk.”

Australia’s dollar fell to 69.58 yen from 71.64 on April 17, and New Zealand’s dollar declined to 54.85 yen from 56.31 a week earlier. The U.S. government is scheduled to release the results of its so-called stress tests on May 4.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.