Pound Trades Near Six-Month Low Amid Budget-Deficit Concern

By Morwenna Coniam and Anna Rascouet

Sept. 22 (Bloomberg) -- The pound traded near its lowest level in almost six months against the euro on concern that the widening U.K. budget deficit will hurt demand among investors for the country’s assets.

Sterling declined earlier against the 16-nation currency as Prime Minister Gordon Brown said the global economy has yet to feel the biggest impact of government-led spending programs to boost demand. Stimulus measures put into place by Brown between 2008 and 2010 totaled 3 percent of the U.K.’s gross domestic product, according to the International Monetary Fund.

“The U.K. has got one of the worst fiscal positions in Europe,” said Ian Stannard, a currency strategist in London at BNP Paribas SA. “Sterling is coming back under pressure. It’s going to struggle to participate in any rebound in the pro- cyclical currencies. Investors will be looking elsewhere.”

The pound traded at 90.68 pence per euro as of 1:47 p.m. in London, from 90.55 pence yesterday. It earlier touched 90.821, its weakest level since April 9. Sterling rose 0.7 percent against the dollar to trade at $1.6327.

The government, which is planning to raise 220 billion pounds ($359 billion) this fiscal year, may boost sales to 237 billion pounds in the fiscal year ending 2011, according to Citigroup Inc.

The pound lost almost 6 percent against the euro since June, after climbing 12 percent in the first half, as the Bank of England increased the size of an asset-purchase program designed to haul the economy out of the recession.

Parity with Euro

The pound may weaken to parity with the euro “towards the end of the year,” Stannard said.

Investors should sell the euro against the pound with a target of 84 pence, Goldman Sachs Group Inc. analysts wrote in a note today, predicting “a relative tightening in financial conditions in the U.K. versus the euro zone.”

Britain’s budget deficit next year will exceed 12 percent of GDP, the most in the G-20, according to the IMF. The Bank of England said yesterday “the long-run sustainable real exchange rate” for sterling may have fallen during the financial crisis.

The yield on the two-year gilt was little changed at 0.85 percent. The yield on the 10-year security rose 3 basis points to 3.77 percent. The difference in yield, or spread, between the two securities was at 291 basis points, near the widest since at least January 1992, when Bloomberg began compiling the data.

To contact the reporters on this story: Morwenna Coniam in London at mconiam@bloomberg.net To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net;