By Anchalee Worrachate Nov. 25 (Bloomberg) -- The pound dropped against the dollar on investor skepticism that government plans to revive the U.K. economy by boosting spending will work. The British currency snapped a two-day gain versus the dollar after Prime Minister Gordon Brown’s government yesterday proposed a tax-and-spending package that will cost 25.6 billion pounds ($38.6 billion) and create the largest deficit among the Group of Seven industrialized nations. U.K. home loan approvals fell by more than half from a year earlier in October, the British Bankers’ Association said today. “The principle concern about the budget is whether it would work,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. “You’ve got the asset-price boom that collapsed, leaving a huge amount of debt that is far greater in the U.K. proportionately than anywhere else. This is not the time to buy sterling.” The pound declined to $1.5072 as of 11:25 a.m. in London, from $1.5183 yesterday. Against the euro, the U.K. currency was little changed, at 85.25 pence. The government will issue 146.4 billion pounds of bonds, the London-based Debt Management Office said yesterday after Chancellor of the Exchequer Alistair Darling’s pre-budget report to Parliament. That’s an 83 percent increase from the 80 billion pounds the government originally planned, in March. The median forecast of 11 banks that deal directly with the Treasury and surveyed by Bloomberg was 138.1 billion pounds. Two-year notes fell, underperforming longer-dated maturities, on supply concern after the DMO said 43 percent of the issuance this year will be in short-dated bonds. The yield on the two-year gilt rose 8 basis points to 2.15 percent. The price of the 4.75 percent debt due June 2010 fell 0.13 or 1.3 pounds per 1,000-pound ($1,514) face amount, to 103.90. “It’s a reflection of concern over supply as the DMO is going to focus on the front end,” said Charles Diebel, London-based head of European interest rate strategy at Nomura International Plc. “But any pullback is likely to be temporary. I’m still bullish on short-dated bonds given the macro economic context.” Credit-Default Swaps The cost of hedging against losses on British government bonds rose to a record in the market for credit- default swaps. Five-year contracts on U.K. gilts climbed 12 basis points to 100, according to CMA Datavision prices in London. Contract on gilts are quoted in U.S. dollars and a basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Ten-year gilts advanced as declines in stocks boosted demand for safest assets. The yield on the note slid three basis points to 3.90 percent. The price of the 5 percent note due March 2018 climbed 0.23, or 2.3 pounds per 1,000- pound face amount, to 108.46. Yields move inversely to bond prices. Ten-year bonds were underpinned by an industry survey showing the housing market declined. Banks granted 21,584 loans for house purchases in October, down 52 percent from a year earlier, the London-based BBA, which represents the U.K.’s biggest banks, said today in a statement. The seizure in credit markets has reduced banks’ capacity to lend, even as the Bank of England cut interest rates to the lowest since 1955. “Clear Signs” Bank of England policy maker Andrew Sentance said today he sees “clear signs” that the U.K. economy is in recession. The central bank signaled last week it’s prepared to cut borrowing costs further to buoy the economy. Policy makers lowered the main interest rate 150 basis points on Nov. 6 to 3 percent. They will reduce the rate a further 75 basis points at the next meeting, according to a Credit Suisse Group AG index of probability based on overnight index-swap rates. The pound may gain more than 10 percent against the dollar, Citigroup Inc. said, citing charts used to predict currency movements. A rally from near the 76.4 percent Fibonacci retracement of the pound’s climb from $1.4557 to $1.5249 between Nov. 13 and 19 may indicate “daily momentum is turning up,” New York-based Tom Fitzpatrick and London-based Shyam Devani wrote in a report dated Nov. 24. Investors should target a gain in the pound to $1.5950 and possibly to $1.67, and exit the trade if the currency weakens to $1.4698, they said. The currency lost almost 45 percent against the Japanese yen since June as the financial crisis prompted investors to shun higher-yielding currencies. It fell 8 percent against the euro during the same period. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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