The pound dropped against all of the other major currencies after Moody’s Investors Service said Britain’s finances are “deteriorating rapidly” and a government report showed the economy shrank the most since Margaret Thatcher became prime minister in 1979. The yen rose to the highest level versus the dollar this month as Nikkei English News said authorities will limit the leverage on foreign-exchange margin trading, reducing demand for Japan’s currency as a source of funding for investments in higher-yielding assets. “It’s a pretty nasty cocktail for the pound,” said Adam Cole, head of global foreign-exchange strategy at RBC Capital Markets in London. “Weak data and concerns about budget conditions leading to ratings downgrades are putting pressure on the currency.” The pound fell 0.7 percent to $1.4622 at 8:34 a.m. in New York, from $1.4722 yesterday. The yen gained 1 percent to 97.04 per dollar from 97.96 after reaching 96.64, the strongest since March 30. The dollar lost 0.6 percent to $1.3228 per euro from $1.3144. The euro fell 0.3 percent to 128.33 yen from 128.77. Sterling was headed for a 2.7 percent drop versus the euro this week, the biggest five-day decline since mid-March. It was down 1.3 percent versus the dollar. The euro was poised for a weekly gain of 1.5 percent versus the dollar. The yen appreciated 2.2 percent versus the dollar and 0.7 percent against the euro. U.K. Balance Sheet Britain’s “balance sheet is deteriorating rapidly, due to a combination of weakening revenues and the accumulation of sizeable assets and contingent liabilities as a result of successive bank bailouts,” analysts at Moody’s including Arnaud Mares in London wrote in a report yesterday. “The government is taking risks with public finances.” Britain’s Aaa rating isn’t immediately under threat, Moody’s also said. The outlook “is stable,” it said. “The article is weighing on the pound, particularly against the euro,” analysts led by David Woo, London-based head of currency strategy at Barclays Capital, wrote in a research note today. “The credit ratings fear is an idiosyncratic risk for sterling.” S&P cut Ireland’s credit rating to AA+ from AAA last month as global financial turmoil swelled the budget deficit. The company lowered the ratings of Spain, Portugal and Greece in January. Moody’s placed Ireland’s Aaa rated government bonds on review for a possible downgrade on April 17, citing the nation’s “severe economic adjustment.” Britain’s Economy U.K. gross domestic product fell 1.9 percent in the first quarter, after declining 1.6 percent in the previous quarter, the Office for National Statistics said today in London. A Bloomberg forecast had estimated a 1.5 percent drop. The yen climbed after Nikkei English News reported Japan’s Financial Services Agency decided to limit the leverage on currency margin trading to between 20 and 30 times an investor’s initial principal, from a typical level of 100 to 600 times, the newspaper said, citing an agency official. “The yen is being bought as a knee-jerk reaction,” said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. “Combined with a slightly elevated level of risk aversion, we’ll see the yen crosses remain well-supported in the months ahead.” Margin traders held about 25 percent of the leveraged bets against the yen at the height of the so-called carry trade in 2007, Hardman said. The yen will trade closer to 95 than 100 per dollar in the next couple of months, he said. German Sentiment The euro gained versus the dollar after a report showed German business confidence advanced from a 26-year low in April. Germany’s Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 83.7 from 82.2 in March. Economists expected a gain to 82.3, the median of 36 forecasts in a Bloomberg News survey showed. “Hopes are emerging that the euro-zone recession is waning, given the recent data,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is positive for the euro.” Japan’s currency headed for a third weekly advance versus the dollar on speculation U.S. banks will report additional loan losses. U.S. lenders may need another $1 trillion in capital to cushion losses, KBW Inc. analysts said yesterday. The U.S. government is scheduled to release the results of its so-called stress tests on May 4. “Any unexpected banking losses that come out of these tests would be worrying,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “This would likely cause buying of the yen as investors shun risk.”

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