The pound dropped against every major currency after Standard and Poor’s signaled Britain may lose its top credit rating for the first time. The U.K. currency had its biggest decline in a month versus the dollar and dropped the most in two weeks against the euro after S&P lowered the outlook on the U.K.’s AAA rating to “negative” from “stable.” The dollar traded near an eight- week low against the yen amid speculation the U.S. Federal Reserve will print more cash to boost purchases of assets as it seeks to counter the global slump. The euro rose to a four-month high against the dollar after a German manufacturing and services survey beat economists’ forecasts. “We are suggesting clients take profit on long pound positions” following the S&P announcement, said Neil Jones, head of hedge-fund sales in London at Mizuho Corporate Bank Ltd., wrote in a note to clients today. The pound weakened to $1.5659 as of 10:22 a.m. in London, from $1.5755 yesterday, and to 88.46 pence per euro, from 87.47 pence. The dollar depreciated to 94.66 yen, from 94.88 yen, and $1.3802 per euro, from $1.3780. 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 ($343 billion) of bonds in the fiscal year through March 2010 as the recession cuts revenue and forces the government to raise spending. S&P Statement “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 dollar fell after Fed policy makers, meeting April 28- 29 in Washington, said they saw “significant downside risks” to the outlook for the economy, with the global financial system still “vulnerable to further shocks,” minutes of the session released yesterday showed. The report indicates the Fed may be ready to build on its plan in March to buy $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.” Economic Contraction The Fed projected a fourth-quarter U.S. contraction of 1.3 percent to 2 percent from a year earlier, according to the minutes. That compares with January projections for a contraction of 0.5 percent to 1.3 percent. 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, declined 0.1 percent to 81.070 after dropping to 80.897, 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 up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy, a measure known as quantitative easing. Former Fed Chairman Alan Greenspan signaled the financial crisis isn’t over, warning that U.S. banks need to raise “large” amounts of money. “We’re on the edge and if this thing doesn’t get resolved quickly I’m worried,” Greenspan said yesterday before a meeting with House of Representatives members. European Manufacturing The euro held near the strongest since January versus the dollar after a report showed Germany’s manufacturing industry contracted at the slowest pace in seven months. An index based on a survey of manufacturers rose to 39.1 in May from 35.4 in April. The median estimate in a Bloomberg survey of 26 economists was for a reading of 37. 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.” Investors reduced bets European policy makers will cut their 1 percent benchmark at their June 4 meeting. The implied yield on the three-month Euribor futures contract for June delivery was 1.185 percent today, from 1.105 percent at the beginning of the week. Yen Gains The yen advanced versus 15 of the 16 major currencies as a survey published by Barclays Capital showed Japan’s money managers judge the market’s outlook for the U.S. economy to be too positive. About 82 percent of the 55 institutional investors who responded described the market’s outlook as either “extremely” or “somewhat” optimistic, according to the survey of Japanese funds released today. “The majority of Japanese investors believe the outlook for the economy currently factored into the U.S. markets is overly optimistic,” Yoshio Takahashi, head strategist for non- Japanese debt in Tokyo at Barclays Capital, wrote in the research note. 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.

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