Pound Falls Versus Euro, Dollar on U.K. Bank Plan; Ruble Drops

By Lukanyo Mnyanda

Jan. 19 (Bloomberg) -- The pound fell against the euro and the dollar after British Chancellor of the Exchequer Alistair Darling unveiled the second bank rescue in three months.

The U.K. currency also dropped against the yen after Darling said the government will extend a Bank of England program to inject money into the financial system and proposed insurance to underwrite mortgage-backed debt and toxic assets. The ruble fell below the weakest level since before the 1998 Russian crisis after the central bank devalued the currency for the sixth time in seven days to protect foreign cash reserves.
“It’s all about the banks again, and the market has clearly not reacted positively to the news,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International, the third-largest Dutch lender. “We’re going to see more pressure on sterling.” 

The U.K. currency weakened 0.3 percent to 90.29 pence per euro as of 10:10 a.m. in London. Against the dollar, it lost 0.4 percent to $1.4680. The pound bought 133.13 yen from 133.78. The ruble slid to as low as 32.9568 per dollar today, the weakest since early 1998, before the government defaulted on $40 billion of debt. The currency has lost 7.3 percent since official trading resumed this year on Jan. 11.
The Japanese yen snapped two days of losses versus the euro and the dollar as Russia’s devaluation prompted investors to reduce holdings of emerging-markets assets.
The yen rose to 90.68 against the dollar from 90.72 in New York on Jan. 16. It earlier touched 91.30, the lowest level since Jan. 9. The currency was at 120.19 per euro, after touching 122.17, the lowest level since Jan. 9.

The euro traded at $1.3250 from $1.3267, and the Swiss franc was unchanged at 1.1197.

Obama Hopes 

Investors should sell the U.K. currency against both the yen and the dollar on speculation more than $1 trillion of asset writedowns worldwide and rising credit losses will damp demand for riskier assets, Stretch said. It may drop to $1.40 and 1.285 yen in the “next couple of weeks,” he said. 

The yen’s gains were limited as investors bet President- elect Barack Obama will step up efforts to recapitalize U.S. banks. Stock markets rose across Europe and U.S. stock futures also traded higher.
“Hopes over the Obama administration are improving risk- taking appetite,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s second-largest bank by market value.
Currency movements may be exaggerated today because U.S. financial markets are shut for the Martin Luther King Day holiday, said Saito.
The yen slid the most against the Norwegian krone, falling 1.2 percent to 13.2232. It lost as much as 1.8 percent to 50.52 against New Zealand’s dollar. It was 0.5 percent lower at 61.41 versus Australia’s dollar.

U.K. Plan 

The British government said in a statement today that it will increase its stake in Royal Bank of Scotland Group Plc as it converts the 5 billion pounds ($7.4 billion) of preferred shares it bought last year to ordinary stock.
The new U.K. measures would add at least 100 billion pounds to the 250 billion pounds committed by Prime Minister Gordon Brown in October to underwrite a financial system choked with bad debt and reeling under the first recession in two decades. They increase the government’s grip on consumer and corporate banking and expose taxpayers to hundreds of billions in losses.

“Any positive pound reaction to today’s bailout news may provide a good opportunity to short the pound,” Emma Lawson, a currency strategist in London at Merrill Lynch & Co., wrote in a client note today. “We remain short pound-dollar.” A short position is a bet an asset price will decline.

The pound may drop to as low as $1.20, Michael Klawitter, a Frankfurt-based currency strategist at Dresdner Kleinwort, said in a Bloomberg Television interview today. 

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
Last Updated: January 19, 2009 05:27 EST