BLBG: Pound Drops to 13-Month Low as Election Signals No Clear Winner
By Paul Dobson and Garfield Reynolds
May 7 (Bloomberg) -- The pound fell to a 13-month low as results from the U.K. election put the Conservatives on course to win the most seats, without gaining an overall majority, fueling concern a new government won’t be strong enough to tackle the budget deficit.
The currency fell for a sixth day as David Cameron’s Conservatives won 275 seats in the 650-seat House of Commons, compared with 223 for Labor, after about 90 percent of results had been announced. Business Secretary Peter Mandelson said the sitting government should have the “first go” in trying to remain in power in such a scenario. Cameron said the results showed Labour had lost its “mandate to govern.”
“Sterling is as clear a barometer as you can get about the need for a government with a clear mandate,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “It’s that level of uncertainty that’s weighing on sterling. The results have been so erratic it’s difficult to get anything meaningful from them.”
The pound fell to $1.4630 as of 6:43 a.m. in London, from $1.4833 in New York yesterday after dropping to $1.4597, the lowest since April 2009. It dropped to 86.56 pence per euro, from 85.09 pence as Europe’s single currency strengthened against all but one of its 16 major counterparts.
The pound has declined 4.8 percent this year, Bloomberg Correlation-Weighted Currency Indexes show, amid concern a hung parliament would leave the nation with a government too weak to manage its 167 billion-pound ($244 billion) shortfall. The U.K.’s budget deficit is more than 11 percent of gross domestic product, the biggest in the Group of Seven nations.
IMF Specter
The Conservatives have pledged to make bigger cuts than Labour and the Liberal Democrats, Britain’s third main party. They raised the specter last week of an International Monetary Fund bailout if the election produces an indecisive result.
It’s unlikely that Cameron “gets an outright majority, but not out of the question,” Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney, said today in a research note. “If he does draw close to an outright majority it will tend to support the pound.”
Standard & Poor’s affirmed its “negative” outlook on the U.K.’s AAA rating on March 29 “in the absence of a strong fiscal consolidation plan.” Moody’s Investors Service said Britain has moved “substantially” closer to losing the top rank as debt costs climb. Fitch Ratings said March 24 the pace of deficit reduction is too slow.
Should the election produce no clear winner, it would be the first so-called hung parliament since 1974. On that occasion, it took four days before Conservative Edward Heath resigned as premier, allowing the Queen to name Labour’s Harold Wilson to lead a minority government.
The unpredictability of the election prompted London’s Liffe derivatives exchange to allow futures contracts on gilts, the FTSE 100 Index and short-sterling to be traded from 1 a.m. London time. Gilt futures expiring in June declined 0.4 percent to 116.80.
To contact the reporter on this story: Garfield Reynolds in Sydney at greynoldws1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.
