Thursday, January 22, 2009

Pound Nears Record Low Versus Yen on Nationalization Concerns

By Lukanyo Mnyanda

Jan. 22 (Bloomberg) -- The pound declined for a fourth day against the yen, trading near a record low, on speculation a deepening financial crisis will force the U.K. government to seize control of the country’s banks.

The pound was also close to a 23-year low versus the dollar before a government report tomorrow that may show the British economy shrank the most since 1990. The yen gained against the euro and the dollar as a French report showed consumer spending fell in December more than economists expected. The Swiss franc weakened after Swiss National Bank Vice President Philipp Hildebrand pledged to sell “unlimited” amounts of the currency to curb its appreciation.

“It’s the economy, and everyone is so negative on sterling at the moment,” said Lee Ferridge, a senior macro strategist in London at State Street Bank & Trust Co., a unit of the world’s largest money manager for institutions. “I’m not prepared to buy it right now.”

The pound fell to 122.07 yen as of 7:02 a.m. in New York, from 124.88 yesterday, when it slid to a record low of 119.42. The U.K. currency declined to $1.3759 from $1.3955. It yesterday touched $1.3622, the lowest level since September 1985. Against the euro, the pound dropped to 94.17 pence from 93.27.

Japan’s currency climbed to 115.28 per euro from 116.54 yesterday, when it reached 112.12, the strongest since March 2002. The yen gained to 88.72 a dollar, from 89.49 yesterday after advancing to 87.13, the highest since July 1995. The Swiss franc dropped to 1.1567, from 1.1532 per dollar and was at 1.5019 against the euro, from 1.5022.

Sterling Losses

Investors should consider reducing “long” euro positions versus the pound on speculation the euro-area economic slump will deepen, said Ferridge, who expects the pound to keep weakening versus the dollar. A long position is a bet that the price of a currency or security will rise.

Sterling lost 5.5 percent versus the dollar and 4.8 percent against the euro in the past five days as the U.K. government’s plan for a second bank bailout in three months raised concern the financial crisis is worsening.

Britain’s currency slumped a fifth day against the euro, even after French Finance Minister Christine Lagarde said the Bank of England needs to do more to prevent its depreciation.

The U.K. central bank hasn’t been “very efficient in providing more support for the British currency,” Lagarde told lawmakers in Paris yesterday.

The pound’s slide indicates investors are betting Britain will lose its AAA credit rating, Merrill Lynch & Co. strategists including London-based Emma Lawson wrote in a report today.

Further Deterioration

Britain’s gross domestic product probably contracted 1.2 percent in the fourth quarter from the previous three months, according to a Bloomberg News survey of economists before tomorrow’s report from the Office for National Statistics. The pound stayed lower after the Financial Services Authority said U.K. home repossessions rose 92 percent in the third quarter.

“A lot of negative news has already been priced into sterling,” Brian Kim, a UBS strategist in Stamford, Connecticut, wrote in a report yesterday. “We would stress caution before chasing further moves to the downside, especially on the euro axis.”

The Bank of England will lower its benchmark rate by a half-percentage point to 1 percent at its Feb. 5 meeting, a separate Bloomberg survey showed.

Gains in the yen were tempered after Japan’s top currency official said he didn’t rule out action to curb its advance.

Falling Exports

“We are closely monitoring movements in the currency market,” Naoyuki Shinohara, vice finance minister for international affairs, told reporters in Tokyo today. Asked whether Japan will intervene to curb the yen’s advance, Shinohara said he had no comment.

Bank of Japan Governor Masaaki Shirakawa said in Tokyo today that the yen’s gains hurt Japanese exporters and the economy in the short term.

Japan’s exports plunged a record 35 percent in December from a year earlier, a report from the Finance Ministry showed today. China’s economy expanded 6.8 percent last quarter from a year ago, the slowest pace in seven years, its statistics bureau said. South Korea’s economy shrank a larger-than-expected 5.6 percent in the fourth quarter, the Bank of Korea said.

Toyota Motor Corp., Sony Corp. and Honda Motor Co. are cutting jobs and closing production lines as profits and sales dwindle.

Geithner Comments

The Bank of Japan kept the benchmark rate at 0.1 percent in a unanimous vote today. The decision was forecast by economists surveyed by Bloomberg. Japan has intervened in the currency markets, selling a record 20.4 trillion yen ($229 billion) in 2003, and 14.8 trillion yen in the first quarter of 2004.

“The BOJ probably won’t accept the yen breaching the 85 level” against the dollar, Lutz Karpowitz, a currency strategist in Frankfurt at Commerzbank, said in a telephone interview yesterday. “Risk aversion will remain at elevated levels and the yen will continue to be seen as a safe haven.”

Timothy Geithner, U.S. President Barack Obama’s nominee for Treasury Secretary, said at his confirmation hearing yesterday that it’s important for America’s biggest trading partners to refrain from setting or manipulating exchange rates.

The euro slid to $1.2987 after a French report showed that consumer spending on manufactured goods, which accounts for about 15 percent of the economy, declined 0.9 percent from November. Economists expected a 0.2 percent drop, a Bloomberg survey showed.

The franc weakened against the dollar after Hildebrand said in a speech in St. Gallen, Switzerland, late yesterday the central bank “is able to sell unlimited Swiss francs versus another currency.”

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