BLBG:Pound Falls To 4-Month Low Versus Dollar On Europe Debt Concern
The pound weakened to a four-month low against the dollar amid speculation the fallout from Europe’s debt crisis is spreading and may harm the outlook for the U.K. economy.
The British currency dropped for a third day against the yen after Nobel laureate Paul Krugman said the government should drop its commitment to fiscal cutbacks and boost spending to avert an extended downturn. Gilts jumped, with five- and 10-year yields sliding to records, after Bank of England Markets Director Paul Fisher told the Leicester Mercury that U.K. companies need to protect against the risk of a euro breakup. Spain’s default risk rose to an all-time high.
“Sterling is going to increasingly feel the negative effects coming from the euro region and the news about the Spanish banking system,” said Ian Stannard, Morgan Stanley’s London-based head of European currency strategy. “Sterling has a lot of linkages to the euro region through the banking system and via trade, so it will come under pressure as the situation in the euro region intensifies.”
The U.K. currency fell 0.3 percent to $1.5601 at 12:01 p.m. London time. It dropped to as low as $1.5551, the least since Jan. 25. The pound slid 0.7 percent to 123.480 yen, after declining 0.4 percent in the previous two days. Sterling was little changed at 79.86 pence per euro.
Morgan Stanley forecasts the pound will depreciate to $1.53 by year-end, Stannard said.
Credit-Default Swaps
The euro dropped against the dollar for a second day as Spain struggled to bolster its banking system amid surging borrowing costs. Europe needs to take steps to help “debt sustainability,” Spanish Prime Minister Mariano Rajoy said today. Credit-default swaps on Spain climbed to a record 583 basis points.
“No one is trying to anticipate a euro breakup, but you just can’t rule it out,” Fisher said, according to an interview in the newspaper. Prime Minister David Cameron and Bank of England Governor Mervyn King met on May 28 to discuss plans to insulate the British economy from any escalation of the euro- area debt crisis.
The 10-year gilt yield fell as much as nine basis points, or 0.09 percentage point, to 1.684 percent, the least since Bloomberg began compiling the data in 1989. Five-year note yields also declined to an all-time low of 0.680 percent.
In a “depressed economy” officials should realize that “this is the time for the government to act as the spender of last resort,” Krugman said yesterday in a speech at the London School of Economics. “Supplement that with exotic monetary policy. If you want to worry about debt and deficits, fine, but this is the time, to quote St. Augustine, to say ‘Oh Lord, make me chaste and continent, but not yet.’”
Double-Dip Recession
The U.K. economy slid into its first double-dip recession since the 1970s in the first quarter amid the financial crisis in Europe and Cameron’s commitment to the biggest fiscal squeeze since World War II.
Krugman said the focus on reducing the U.K.’s ratio of debt to gross domestic product doesn’t need to be the center of policy because Britain, like the U.S., has the benefit of being able to borrow in its own currency.
To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.
