Pound Declines for Second Day as Banking Concerns Resurface

Pound Declines for Second Day as Banking Concerns Resurface


Sept. 18 (Bloomberg) -- The pound weakened for a second day against the dollar on renewed concern the financial crisis in Europe will be prolonged, damping demand for the region’s assets.

Britain’s currency dropped against 15 of its 16 major counterparts after the Daily Telegraph said Lloyds Banking Group Plc had been forced to abandon a move to withdraw from the U.K. government’s asset protection plan. The dollar pared weekly losses against the Australian and New Zealand dollars as Asian stocks retreated, reviving demand for the relative safety of the U.S. currency.

“The Telegraph article enhanced views the Bank of England can’t exit its accommodative monetary policy stance any time soon,” said Akira Hoshino, Tokyo-based chief manager of the foreign-exchange trading department at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s largest banking group. “Receding hopes for an imminent exit will put pressure on the pound.”

The pound declined to $1.6379 as of 6:16 a.m. in London from $1.6453 in New York yesterday, after earlier falling to $1.6358, the lowest level since Sept. 8. The U.K. currency dropped to 149.34 yen from 149.86 yen. The yen was at 91.17 per dollar from 91.08.

The pound dropped to a one-week low after the Telegraph said Lloyd’s Chief Executive Officer Eric Daniels is understood to have presented the Financial Services Authority with plans to raise more than 15 billion pounds ($25 billion).

Require More Capital

The FSA decided Lloyds would require more capital to withstand rising bad debts and to lend an additional 28 billion pounds to businesses and households this year and next, as agreed with the government, the Telegraph said. The newspaper didn’t name a source for the information.

Lloyds sought a government rescue in the wake of Lehman Brothers Holdings Inc.’s collapse a year ago. The bank was crippled by its takeover of HBOS Plc and agreed to pay a fee of 15.6 billion pounds in March for state guarantees of losses from toxic assets. The U.K. Treasury took control of Royal Bank of Scotland Plc at about the same time.

The U.K. currency also weakened after British Bankers’ Association data showed the cost of three-month loans in sterling between banks fell for a 13th day. That spurred speculation traders sold the pound to fund investments in higher-yielding assets in so-called carry trades.

Bank of England Governor Mervyn King said this week that policy makers may lower the interest rate paid to hold reserves at the central bank.

“The market is now focusing on which central banks of the developed countries will be the first to pull out of quantitative easing,” Hoshino said.

EU Proposal

The euro dropped from near a one-year high versus the dollar after the EU, in proposals to be put forward at next week’s Group of 20 nations meeting in Pittsburgh, said yesterday “restructuring of the banking sector must take place.”

“The functioning of the banking system remains critical to restoring growth and reestablishing credit flows” the group said in a statement at the end of a summit in Brussels. European Commission President Jose Barroso said in a Bloomberg Television interview yesterday that Europe needs continued low interest rates and government stimulus measures to keep the recovery on track.

“The EU appears to be worried over the banking industry in Europe,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This may spark risk aversion, leading to selling of European currencies such as the euro.”

The European Central Bank has held its benchmark interest rate at 1 percent since May this year and has used “non- standard measures” including lending banks as much cash as they want to fight the region’s recession.

Risk Aversion

The dollar rose against 14 out of the 16 most-active currencies as Asian stocks declined after Aiful Corp., Japan’s third-largest consumer lender by revenue, sought to reschedule debt payments and metal prices fell. The Nikkei 225 Stock Average retreated 0.7 percent and the MSCI Asia Pacific Index of regional shares lost 0.3 percent.

“Falling equities are spurring risk aversion,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This is causing buying back of the dollar, which has been used as a funding currency for carry trades.”

Australia’s and New Zealand’s dollars trimmed weekly gains as technical indicators signaled their advances versus the dollar may stall. The 14-day relative strength index for the Australian dollar against the greenback climbed to 70 on Sept. 16, the highest since June 2. A reading of 70 indicates a reversal in direction may be imminent.

‘Headwinds’

“Given the fact that the global economy has not rebounded to pre-financial crisis levels, currencies such as the Australian dollar that have already fully recovered may face headwinds in extending their advances,” said Daisaku Ueno, chief analyst at Gaitame.Com Research Institute Ltd., a unit of Japan’s largest currency margin company.

Bank of Japan Governor Masaaki Shirakawa said yesterday that while stimulus measures have helped the economy improve, “we’re not confident about the strength of private final demand after those effects fade.”

Australia’s currency slid to 87.06 U.S. cents from 87.28 cents yesterday, when it rose to 87.75 cents, the highest since August 2008. New Zealand’s dollar traded at 71.01 U.S. cents from 71.07 cents yesterday, when it reached 71.58 cents, also the most since August last year.

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

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