Sterling fell sharply on Tuesday as the government’s latest bank rescue plan did little to assure investors about the ailing banking sector and raised concerns about the government’s ability to service its ballooning debt.
The pound hit a 7-1/2 year low against the dollar, and was on track for its biggest one-day percentage fall against the US unit since late 1992. It hit a record low against the yen. Sterling extended its downtrend as bank share prices turned negative, notably Lloyds Banking Group which fell by nearly 50% at one point.
Bank stocks had rebounded in early trade after collapsing on Monday when Royal Bank of Scotland recorded the biggest loss in British corporate history. “The British economy is in deep trouble and investors are in no mood to hang around and wait for a pick up,” said Maurice Pomery, head FX at IDEAGlobal in London. “Some are becoming increasingly disturbed by the cost of all this and how it will ever get repaid.”
By 12:01 p.m., the pound was down 3.3% on the day at $1.3976 after falling as low as $1.3915, its lowest since June 2001. Sterling also fell three percent against the yen to a new record low of ¥125.62. Trade-weighted sterling fell 3.2% to 74.9, the lowest level since January 5, while the pound also hit a two-week low against the euro at 93.17 pence.
The prospect of a prolonged economic downturn, a fall in interest rates to near zero and the government issuing debt to cover the latest bank rescue weighed on sterling, especially after sovereign rating downgrades of some euro zone countries such as Spain and Greece.
US rating firm Standard and Poor’s said it had nothing to add to its note from last week when it affirmed UK’s long-term AAA debt rating on January 13, with a stable outlook. Moody’s Investor Services also had no comment.
Analysts expect sterling to remain vulnerable. “Sterling is set to weaken further,” said Neil Jones, head of hedge fund sales at Mizuho in London, adding he expected to see sterling hit parity against the euro and all time lows against others such as the yen until UK rates fell to zero.
The battered UK currency got a brief reprieve after data showed consumer price inflation slowed by a smaller-than-expected 3.1% in December. Bank of England Governor Mervyn King is set to give his first keynote speech of the year this evening, with markets eying details of the central bank’s new asset plan and so-called quantitative easing.
The government’s bank plan unveiled on Monday included a new £50 billion facility that would allow the Bank to buy high quality assets and most strikingly, the central bank would be allowed to use this framework to boost the money supply in order to boost the economy as it runs out of room on interest rates. (Reuters)