Pound Drops to Two-Week Low Against Dollar on Banking Concerns

By Lukanyo Mnyanda and Yasuhiko Seki

Sept. 18 (Bloomberg) -- The pound fell to the weakest level in two weeks against the dollar as speculation Lloyds Banking Group Plc needs to do more to clean up its balance sheet revived concern bank losses will stall the economic recovery.

Britain’s currency weakened to 90 pence per euro for the first time since May after Lloyds said it may exit a government program to insure 260 billion pounds ($425 billion) of its risky assets. The dollar pared weekly losses against the Australian and New Zealand currencies and gained the most against the South African rand as stocks retreated, sapping demand for higher- yielding assets.

“Financial-sector worries are not going away anytime soon,” said Geoffrey Yu, a currency strategist in London at UBS AG, which Euromoney Institutional Investor Plc ranks as the world’s second-biggest currency trader. “The pound should remain under pressure in the short term.” 

The U.K. currency declined to $1.6360 as of 7:13 a.m. in New York, from $1.6453 yesterday, after earlier falling to $1.6297, the lowest level since Sept. 4. It weakened to 89.91 pence per euro, after reaching 90.11, the lowest level since May 13. The pound also dropped to 149.36 yen from 149.86 yen. The yen was at 91.30 per dollar from 91.08 and the dollar appreciated to $1.4707 per euro from $1.4741.

Lloyds was forced to abandon a move to withdraw from the government’s asset-protection plan after it failed to raise enough capital, the Daily Telegraph reported today, without saying where it got the information.

‘Skeletons in Cupboard’ 

“All possibilities remain open and, as part of this process, Lloyds is focused on ensuring that any potential alternatives to GAPS would be in the interest of shareholders and other stakeholders,” the London-based bank said in a statement.

Lloyds received a government rescue in the wake of Lehman Brothers Holdings Inc.’s collapse a year ago. The bank was crippled by its takeover of HBOS Plc and agreed to pay a fee of 15.6 billion pounds in March for state guarantees of losses from toxic assets. The U.K. Treasury also took control of Royal Bank of Scotland Group Plc.

“Sterling will stumble today on the back of this news,” Jane Foley, research director at Gain Capital Group LLC in London, said in a Bloomberg Television interview. “The banking sector probably has more skeletons in the cupboard which will come out in the months ahead in the European financial sector, the Japanese sector and maybe the U.S. too.”

Budget Deficit 

The pound stayed lower after Britain posted the biggest budget deficit for any August since modern records began in 1993 as the recession destroyed taxes and jobless benefit costs soared. The 16.1 billion-pound shortfall compared with a 9.9 billion-pound deficit a year earlier, the Office for National Statistics said in London today. The median of 16 forecasts in a Bloomberg survey was 17.6 billion pounds.

The euro dropped from near a one-year high versus the dollar after the European Union, in proposals to be put forward at next week’s Group of 20 nations meeting in Pittsburgh, said yesterday “restructuring of the banking sector must take place.”

“The functioning of the banking system remains critical to restoring growth and reestablishing credit flows” the group said in a statement in Brussels. European Commission President Jose Barroso said in a Bloomberg Television interview yesterday that Europe needs continued low interest rates and government stimulus measures to keep the recovery on track.

‘Dollar Stability’ 

The European Central Bank has held its benchmark interest rate at 1 percent since May this year and has used “non- standard measures” including lending banks as much cash as they want to fight the region’s recession.

The dollar rose against 13 of the 16 most-active currencies as Europe’s Dow Jones Stoxx 600 Index fell as much as 0.7 percent. U.S. stock futures were little changed.

“Having advanced nearly 3 percent against the dollar since the start of September, the euro could well be set for a period of consolidation or even some correction,” Derek Halpenny, European head of currency strategy in London at Bank of Tokyo- Mitsubishi UFJ Ltd., wrote in a client note today. A “period of correction in equity markets would reinforce the probability of some stability for the dollar.” 

Aussie, Kiwi 

The Australian and New Zealand dollars trimmed weekly gains as technical indicators signaled their advances versus the dollar may stall. The 14-day relative strength index for the Australian dollar against the U.S. currency climbed to 70 on Sept. 16, the highest level since June 2. A reading of 70 indicates a reversal in direction may be imminent.

Bank of Japan Governor Masaaki Shirakawa said yesterday that while stimulus measures have helped the economy improve, “we’re not confident about the strength of private final demand after those effects fade.”

Australia’s currency slid to 86.92 U.S. cents, from 87.28 cents yesterday, when it rose to 87.75 cents, the highest level since August 2008. New Zealand’s dollar was little changed at 71.06 U.S. cents, after reaching 71.58 cents yesterday, also the most since August last year. The rand dropped for a second day to 7.4406 per dollar, from 7.3857.

Benchmark interest rates are 3 percent in Australia, 2.5 percent in New Zealand and 7 percent in South Africa, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
Last Updated: September 18, 2009 07:20 EDT