Pound May Continue Drop After Polls Indicate Political Deadlock
March 01, 2010, 5:32 PM ESTBy Ben Levisohn and Inyoung Hwang
March 2 (Bloomberg) -- The pound may decline further after falling below $1.50 for the first time in almost 10 months as polls showed Britain may have its first minority government since 1974, hampering efforts to reduce the nation’s debt.
The euro fell yesterday against the dollar the most in almost two weeks as a European Union official said that Greece must achieve its 2010 deficit target in order to regain credibility. The yen dropped versus higher-yielding currencies including Brazil’s real after Financial Services Minister Shizuka Kamei said the Bank of Japan should consider purchasing government debt.
“The pound is in freefall,” said John Doyle, a strategist at currency-trading firm Tempus Consulting Inc. in Washington. “There seems to be nothing supporting the pound as political worries build. There’s still some downside to the sterling.”
The pound traded at 1.4990 at 7:01 a.m. in Tokyo, after yesterday falling as much as 3 percent to $1.4784, the lowest level since May 1. It was at 90.48 pence per euro, after weakening above 91 pence for the first time since Dec. 4. Sterling fell 1.4 percent to 133.60 yen.
The euro traded at $1.3560, after falling 0.5 percent yesterday. It fetched 120.87 yen, following a decline of 0.3 percent. The Japanese currency was at 49.4763 per real, after dropping 0.8 percent. The yen changed hands at 89.05 per dollar, following a drop of 0.2 percent.
Social Unrest
The euro yesterday fell as much as 1.3 percent against the dollar, the most since Feb. 17, as European Union Monetary Affairs Commissioner Olli Rehn said that Greece must deepen measures to reduce its budget deficit after meeting with Greek Finance Minister George Papaconstantinou. The EU will continue to support Greece as it tackles its deficit, Rehn said.
Four German lawmakers said the nation is considering buying Greek bonds through state-owned lender KfW Group, part of a European plan to grant Greece as much as 25 billion euros ($34 billion) in aid should the need arise. They spoke on the condition of anonymity because the information is confidential.
“The bailout is not going to fix the problem,” said Jessica Hoversen, a foreign-exchange and fixed-income analyst at futures broker MF Global Ltd. in Chicago. “If you propose that Greece implement more austerity measures, you court more social unrest and a further decline in growth. If you don’t, it may allow Greece to skirt fixing the structural problems that put them in this position. These big macro issues are like snow that piles onto the roof until it breaks through.”
‘Their Own Boat’
The euro may weaken to $1.20 to $1.25 because of debt problems faced by Greece and as the U.S. economy “looks a little better,” John Taylor, who oversees the world’s largest currency hedge fund as chairman of New York-based FX Concepts Inc., told an audience at a conference in Dubai yesterday. Taylor also said Gulf states should float their currencies, ending their currency pegs to the U.S. dollar because they “should be able to drive their own boat in the rough seas.”
Sterling had its biggest drop against the dollar since Feb. 2, 2009, as a poll showed the opposition Conservative Party has the smallest lead over the Labour Party in more than two years. Elections must be held by June.
“We have a truly negative sterling story starting to build,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “A hung parliament is now very much the probability. The likelihood that we’re going to move to a rapid lessening of the deficit is being taken away.”
Sterling has tumbled by 7.9 percent against the dollar and 2 percent versus the euro this year as concern over fiscal austerity is heightened by the problems surrounding Greece’s budget deficit.
Bets on a Decline
The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 62,884 on Feb. 23, the most since October 13, 2009, compared with net shorts of 56,079 a week earlier, figures from the Washington-based Commodity Futures Trading Commission showed.
Japan’s currency slipped after Financial Services Minister Kamei’s remarks, which i ncrease political pressure on the BOJ to overcome deflation.
“The central bank should consider underwriting debt to help the government create funds for fiscal stimulus,” Kamei said at a parliamentary hearing in Tokyo yesterday. By law, the Bank of Japan is prohibited from buying debt directly.
The yen fell against the real as Kamei’s comments raised the likelihood that Japanese interest rates would remain low, increasing its attractiveness as a funding currency for carry trades.
In carry trades, investors get funds in one currency with relatively low borrowing costs to invest at higher yields in another. The benchmark interest rate of 0.1 percent in Japan makes the yen popular for funding such transactions, while Brazil’s 8.75 percent rate makes the real an attractive destination for the cash.
--Editors: James Holloway
To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net.
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
