Pound to Drop to Euro Parity, Become Funding Currency, LGT Says

By Candice Zachariahs and Susan Li

Nov. 4 (Bloomberg) -- The U.K. pound may replace the dollar and the yen as the world’s biggest funding currency, dropping sterling to parity against the euro as the Bank of England buys more bonds to combat a recession, LGT Group said.

Britain’s economy shrank for a sixth consecutive quarter in the three months to Sept. 30, the longest contraction since records began in 1955. The Bank of England will expand its bond purchase program to 225 billion pounds ($369 billion) from 175 billion pounds on Nov. 5, according to the median estimate of 48 economists in a Bloomberg News survey.

“The pound could take over even from the U.S. dollar and Japanese yen as the main funding currency,” said Simon Grose- Hodge, a strategist in Singapore at LGT Group, the bank owned by Liechtenstein’s royal family. “Some central banks have already got to the stage where they’re beginning to withdraw stimulus and tighten policy and the U.K. now stands out as the only one that’s still on an easing bias.”

The pound fell 0.2 percent to 89.74 pence against the euro as of 12:45 p.m. in Tokyo from 89.58 pence yesterday. It declined 0.2 percent against the greenback to $1.6409. The U.K. economy shrank 0.4 percent in the third quarter, the statistics bureau said Oct. 3

Sterling will likely trade at parity with Europe’s single currency in six months to a year as the U.K. government’s debt expands and Britain’s financial industry remains weak.

The pound fell yesterday after the government announced a second bailout for Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc amounting to 31.3 billion pounds.

Aussie Set for Parity

Grose-Hodge also said Australia’s dollar -- the world’s best-performing currency against the greenback over the past 12 months -- will likely climb to parity against its U.S. counterpart by the middle of next year.

“There’s very good demand for the Australian dollar and we’re still bullish,” he said.

The Reserve Bank of Australia yesterday raised interest rates for the second time in four weeks, after an Oct. 6 decision that made it the first Group of 20 central bank to raise borrowing costs this year.

Benchmark interest rates are 3.5 percent in Australia, compared with 0.1 percent in Japan, 0.5 percent in the U.K. and as low as zero in the U.S., attracting investors to the South Pacific nation’s higher-yielding assets in so-called carry trades. The risk in such trades is that currency market moves will erase profits.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net