Pound Slides as S&P Signals Britain May Lose Top Debt Rating
By Anna Rascouet and Ye Xie
May 21 (Bloomberg)
-- The pound dropped against most of the other
major currencies after Standard & Poor’s signaled Britain may
lose its
top credit rating for the first time as the government’s finances
deteriorate during the economic slump.
Sterling
declined from a six-month high versus the dollar and dropped
the most in two weeks against the euro as S&P lowered
the outlook on
the U.K.’s AAA rating to “negative” from “stable.” The dollar rose
from
a four-month low against the euro after former Federal Reserve
Chairman Alan Greenspan said the financial crisis isn’t
over,
increasing demand for the greenback as a haven.
“People will be cautious before placing bets on sterling,”
said Brian
Kim, a currency strategist at UBS AG in Stamford, Connecticut. “People
will be watchful, and this will
benefit those currencies of countries
that don’t have fiscal problems, such as the Norwegian krone and the
Australian
dollar. We are going to see a pullback in the pound.”
The pound fell 0.7 percent to $1.5648 at 9:17 a.m. in New
York, from
$1.5755 yesterday. It earlier touched $1.5817, the highest level since
Nov. 10. It dropped as much as 1.4
percent to 88.70 pence per euro,
the largest intraday decline since May 7. The dollar was at 94.90 yen,
compared with
94.88 yen. The U.S. currency traded at $1.3735 per euro,
from $1.3780 yesterday, after touching $1.3839 earlier, the weakest
level
since Jan. 5.
Sterling fell 0.6 percent to 11.8994 Swedish kronor and 0.5 percent
versus 10.05 Norwegian kroner.
Britain’s
Credit
Britain would become the fifth western European Union nation to lose
its rating because of the economic slump,
following Ireland, Greece,
Portugal and Spain. The U.K. plans to sell a record 220 billion pounds
of bonds in the fiscal
year through March 2010 as the recession cuts
revenue and forces the government to raise spending.
“We have
revised the outlook on the U.K. to negative due to our view
that, even assuming additional fiscal tightening, the net general
government
debt burden could approach 100 percent of gross domestic
product and remain near that level in the medium term,”
S&P analysts
led by David Beers in London, said in a report today.
The pound has gained 5.7 percent versus the
dollar this month and 1.8
percent against the euro this month as Britain’s retail sales
increased and the housing
market showed signs the worst of the slump
may be over.
“We are suggesting clients take profit on long pound
positions”
following the S&P announcement, Neil Jones, head of hedge-fund sales
in London at Mizuho Corporate
Bank Ltd., wrote in a research note to
today. A long position is a bet the currency will gain.
U.K.’s Deficit
The
U.K.’s budget deficit this year will reach 175 billion pounds, or
12.4 percent of gross domestic product, Chancellor
of the Exchequer
Alistair Darling said on April 22. The government’s deficit increased
to 8.5 billion pounds last
month, the most for April since records
began in 1993, the Office for National Statistics said in London
today.
The
British economy, the second-largest in Europe, shrank 1.9 percent
in the first quarter, the biggest contraction since 1979,
when
Margaret Thatcher became Prime Minister, the Office for National
Statistics said on April 24. Darling said in his
budget the economy
will slump about 3.5 percent this year, before expanding in 2010.
The government gave the Bank
of England authority to purchase as much
as 150 billion pounds of assets with newly printed money in an attempt
to lower
borrowing costs.
The dollar advanced after Greenspan said yesterday in an interview in
Washington that U.S. banks
need to raise “large” amounts of money.
‘On the Edge’
“We’re on the edge,
and if this thing doesn’t get resolved quickly I’m
worried,” Greenspan said.
The euro earlier
gained versus the dollar after a report showed
Europe’s manufacturing industry contracted at the slowest pace in
eight
months.
An index based on a survey of manufacturers rose to 40.5 in May from
36.8 in April. The median estimate
in a Bloomberg survey of 33
economists was for a reading of 38.3. A reading below 50 indicates
contraction.
Better-than-forecast
European data is “highlighting the improved
sentiment in the region,” analysts at Standard Chartered Bank led
by
Callum Henderson, Singapore-based global head of currency research,
wrote in a research note today. “The euro-dollar
could establish new
highs for 2009 beyond January’s $1.406 high.”
The dollar earlier dropped to an two-month
low against the yen amid
speculation the Fed will print more cash to boost purchases of assets
to counter the global
slump.
Yen Call Options
Traders are paying a larger premium for yen call options against the
dollar, which
grant the right to buy Japan’s currency, over puts that
provide the right to sell it. The premium on yen calls over
yen puts
rose to 2.43 percent today from 2.22 percent yesterday.
Some Federal Reserve policy makers, when they met
April 28- 29,
indicated the central bank might have to build on its plan in March to
buy up to $300 billion of Treasuries
should the economy or financial
markets deteriorate further.
“The dollar’s weakness reflects growing
concern about the fiscal
sustainability of the policy response to the crisis,” Todd Elmer, a
currency strategist
at Citigroup Inc. in New York, wrote in a report
today. “This provides for further dollar downside which extends
beyond
the turn in the risk cycle.”
The Dollar Index, used by the ICE to track the U.S. currency versus
the
euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona,
rose 0.2 percent to 81.324 after dropping to 80.799 earlier,
the
lowest level since Dec. 31.
The dollar dropped a record 3.4 percent versus the euro on March 18,
when the
Fed announced plans to buy U.S. government debt to keep
interest rates low and stimulate the economy, a measure known as
quantitative
easing.
To contact the reporters on this story: Anna Rascouet in London at
arascouet@bloomberg.net; To contact the reporter on this story: Ye Xie
in New York at
yxie6@bloomberg.net
