Jan. 20 (Bloomberg) -- The pound dropped to a record low against the yen and breached $1.40 for the first time since 2001 as the U.K.’s second bank bailout in three months raised concern the financial crisis is deepening.
Sterling had its biggest drop against the euro in a month on Prime Minister Gordon Brown’s plan to support U.K. financial institutions and boost the government’s stake in Royal Bank of Scotland Group Plc. The dollar gained beyond $1.29 per euro for the first time since Dec. 9 as concern banking losses will deepen boosted the greenback’s appeal as a haven.
“The currency market is telling us that there’s risk for a debt crisis in the U.K.,” said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. “The U.K. and Europe need more capital injection into the banking system. Until that happens, money flows back to the U.S.”
The pound slid 3.7 percent to 125.89 yen at 11 a.m. in New York, from 130.71 yesterday, after touching the all-time low of 125.25. It weakened 3.2 percent to $1.3954 from $1.4420, after reaching $1.3863, the lowest level since June 2001. Sterling will slide to $1.30 in the next few months, according to Germanier. Against the euro, the pound fell as much as 2.8 percent to 93.25 pence, from 90.60, the biggest intraday decline since Dec. 18. It depreciated to a record of 98.03 on Dec. 30.
The yen and the dollar gained against all of their major counterparts tracked by Bloomberg after a drop in shares of State Street Corp., Wells Fargo & Co. and BNP Paribas SA boosted demand for the currencies’ safety appeal.
New Zealand’s Dollar
The U.S. dollar appreciated as much as 1.9 percent to 52.68 cents versus New Zealand’s currency, the strongest level since Dec. 5. Japan’s yen appreciated 1.7 percent to 116.44 per euro and 0.6 percent to 90.11 per dollar.
Canada’s currency fell 0.4 percent to C$1.2588 per U.S. dollar after the central bank cut its target lending rate by a half-percentage point to 1 percent, the lowest level since the institution was founded in 1934, and signaled more cuts may be needed. The decision matched the median forecast of 20 economists in a Bloomberg survey.
The British government’s 50 billion pound ($73 billion) plan to stabilize the financial industry announced yesterday followed October’s 50 billion pound bank recapitalization.
The U.K.’s debt may be greater than the government’s November forecast of 146.4 billion pounds in the year to March 31, said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, which cut the June forecast for the pound today to $1.50 from $1.60.
Pound’s Decline
The pound also fell versus all of the 16 major currencies as a government report showed inflation slowed to 3.1 percent in December from a year earlier, the least since April, giving the Bank of England more room to cut interest rates. The trade- weighted pound index lost 25 percent last year.
The decline of the currency will help to “rebalance” the U.K. economy from “consumer-driven” to “export-oriented,” said Trevor Williams, chief economist at Lloyds TSB Corporate Markets, in an interview on Bloomberg Television.
Financial services account for almost 30 percent of the U.K. economy, according to data from the Office for National Statistics. Manufacturing accounts for 14 percent.
“After many years where the currency was overvalued, you’re going to have a period where it’s below fair value, where some competitiveness is restored,” said Williams. “I don’t think it’s bad news at all.”
The BOE reduced its benchmark rate to 1.5 percent this month, the lowest in the bank’s history. Policy makers will probably cut the rate to 1 percent at their Feb. 5 meeting, according to a separate Bloomberg survey.
Interest Rates
At a time when interest rates are sinking toward zero around the world, the biggest currency traders are recommending countries that have the largest trade surpluses, led by Japan, Norway and Switzerland.
BNP Paribas SA, the best currency forecaster in a 2007 Bloomberg survey, says the yen will strengthen about 14 percent against the dollar by June. Goldman Sachs Group Inc. made Norway’s krone one of its top 2009 picks, with possible gains of 17 percent versus the dollar. Bank of America Corp., the largest U.S. lender by assets, says the Swiss franc will advance against every major currency.
Europe’s single currency declined for a second day versus the yen after the Brussels-based European Commission said yesterday the region’s economy will probably shrink 1.9 percent in 2009 and grow 0.4 percent next year.
“We still believe that these estimates are likely to be surprised on the downside,” analysts led by Hans-Guenter Redeker, global head of foreign-exchange strategy at BNP Paribas in London, wrote in a research note yesterday. “We expect the euro to remain under pressure.” The euro will decline to $1.20 and to 94 yen by the end of June, BNP Paribas forecast.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Molly Seltzer in New York at mseltzer4@bloomberg.net
Last Updated: January 20, 2009 11:03 EST
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