British Pound Falls as U.K. Starts to Nationalize Northern Rock

By Kim-Mai Cutler

Feb. 18 (Bloomberg) -- The pound fell against all but one of the 16 most-traded currencies tracked by Bloomberg after the U.K. government said it plans to nationalize Northern Rock Plc.

``Stay away from sterling,'' Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets, said in an interview with Bloomberg Television. ``The Northern Rock news suggests continued instability in the U.K. financial sector.''

Prime Minister Gordon Brown's government plans to take over Northern Rock after the Bank of England was forced to provide the mortgage lender with emergency funding in September as a sudden surge in credit costs caused the first run on a British bank in a century. The euro fell against the dollar today after Bank of France Governor Christian Noyer said economic growth in the European Union may be weaker than expected.

The pound dropped to $1.9513 by 1:44 p.m. in London, from $1.9612 late on Feb. 15. It also fell to the lowest level in two weeks to 75.02 pence per euro, from 74.85 pence. The euro declined against the dollar to $1.4641, from $1.4682.

The U.K. government proposal will leave the Treasury responsible for 113 billion pounds ($222 billion) of Northern Rock's assets and 6,500 employees. The pound snapped five days of gains versus the dollar at the end of last week on speculation gains that drove it to a 10-day high didn't reflect the outlook for falling interest rates and slowing growth in Europe's second-biggest economy.

Recovery `Not Imminent'

``Sterling remains overvalued,'' said Tom Levinson, a currency strategist at ING Groep NV in London who forecast the pound will decline to $1.90 in six months. ``The U.K. economy is quite similar to the U.S. economy in terms of its indebtedness and exposure to the financial sector and housing.''

Restricted bank lending after the collapse of the U.S. subprime-mortgage market will restrain consumer spending and economic growth, according to Bank of England policy maker Timothy Besley.

``With credit conditions tightening, we might expect a significant reduction in consumption growth over the coming months,'' Besley said in the text of speech he is due to give in London today. ``It seems like a fair judgment that a return to the conditions seen for secured lending in the first half of 2007 is not imminent.''

The pound declined even as a private report showed U.K. house prices rose in February after three consecutive months of declines. The average asking price for a property climbed 3.2 percent from January, compared with a 0.8 percent drop the previous month, Rightmove Plc, Britain's most-used property Web site, said. Values in London jumped by 0.9 percent.

`Whipping Boy'

``The pound is the whipping boy,'' Philip Manduca, who helps manage $2 billion as head of investments at ECU Group Plc in London, said in an interview with Bloomberg Television. Investors should buy the pound in the event of a decline to 76 per euro, he added.

The Bank of England will lower the benchmark interest rate to 4.75 percent by midyear from the current 5.25 percent, and to 4.5 percent by the first quarter of 2009, according to the weighted average of 20 forecasts in a Bloomberg survey of analysts. The implied yield on the December sterling futures contract rose 4 basis points to 4.64 percent today.

The euro weakened against 12 of the 16 most-traded currencies today after Noyer was cited by the Financial Times as saying the EU isn't immune to weakness in the U.S. economy or the consequences of the market turmoil triggered by the U.S. subprime-loan crisis.

Traders scaled back bets on the Federal Reserve cutting interest rates by three-quarters of a percentage point next month to prevent the economy sliding into a recession. Futures on the Chicago Board of Trade show a 28 percent chance the Fed will lower the target rate for overnight bank loans to 2.25 percent on March 18, down from 32 percent odds a week ago.

The yen also declined against the dollar after Toyoo Gyohten, Japan's former top currency official, said the economy may enter a recession for one or two quarters this year. The yen traded at 108.13 against the dollar, from 107.82.

Source of info : Bloomberg.com