Saturday, 13 December, 2008
The pound weakened to a record low against the euro after HBOS Plc said bad loans will keep rising as credit conditions deteriorate, signaling the U.K. economic slump is intensifying.
The U.K. currency also declined versus the dollar after the U.S. Senate’s rejection of a $14 billion rescue plan for automakers sent stocks tumbling as demand for riskier assets evaporated. The implied yield on the March short-sterling futures contract fell as traders increased bets the Bank of England will keep cutting interest rates to revive the economy.
“The evidence for further rate cuts is generally seen as incontrovertible and this news from HBOS is the exclamation mark,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., a custodian of $23 trillion of financial assets. “Stocks are down due to the bailout failure and again we see sterling tumble versus the dollar.”
The pound depreciated as much as 1.3 percent to 89.97 pence, the lowest level since the euro’s debut in 1999, and was at 89.78 pence by 4:45 p.m. in London, posting its second straight weekly loss. Against the dollar, it weakened 0.8 percent to $1.4914, paring its gain in the five days to 1.7 percent.
The FTSE 100 Index lost 2.6 percent and the MSCI World Index dropped 2.1 percent. The pound traded in tandem with the FTSE 100 against the dollar more than 80 percent of the time since October, according to data compiled by Bloomberg.
The Bank of England cut its interest rate to 2 percent on Dec. 4, from 5.5 percent at the start of the year, as policy makers tried to limit the fallout from the global financial crisis. The European Central Bank pared its benchmark to 2.50 percent the same day. ECB Governing Council members Axel Weber and Yves Mersch both said today caution is needed in deciding whether to cut rates further.
Bad Loans
HBOS, which agreed to a takeover by Lloyds TSB Group Plc, said this year’s charge for bad loans rose to 5 billion pounds ($7.5 billion), led by an increase in corporate delinquencies that was worse than analysts predicted.
The U.S. Treasury said it’s willing to provide financing to American automakers after the Senate yesterday thwarted the bailout plan aimed at averting the collapse of General Motors Corp. and Chrysler LLC.
The yield on March short-sterling futures contracts fell to 2.16 percent, from 2.18 percent yesterday, signaling increased bets on rate cuts.
“We are going to continue to see new highs in euro- sterling,” Bank of New York’s Mellor said. “There’s a bigger downside, even now, to U.K. interest rates than there is to euro- zone rates.”
Pound ‘Cut Loose’
The pound may be “cut loose” by investors, Steven Barrow, head of G10 currency research in London at Standard Bank Plc, wrote in a note. “Even if the dollar does exhibit some of the seasonal weakness in December, the pound won’t be the major beneficiary.”
Government bonds rose, pushing the yield on the two-year gilt down 11 basis points to 1.67 percent. The 4.75 percent security due June 2010 gained 0.14, or 1.4 pounds per 1,000-pound face amount, to 104.47. The yield on the 10-year gilt fell two basis points to 3.58 percent. Yields move inversely to bond prices.
source:http://www.bloomberg.com/
