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Sterling plummets on UK political turmoil as PM faces calls to quit

Mon, Jun 8 2009, 10:44 GMT
by Benny Menashe

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Sterling fell against the dollar on Friday after a series of resignations by government ministers and calls for Prime Minister Gordon Brown to step down stoked concern about UK political uncertainty. Sterling pared the worst of its losses as Brown announced a cabinet reshuffle and finance minister Alistair Darling was left in his post. The immediate danger of government collapse was averted, but investors were wary that sterling could be dented further, with Brown's position seen by markets as tenuous despite his expressed determination to remain as prime minister. "The Prime Minister may have been able to appoint a cabinet but that doesn't necessarily mean that cabinet responsibility will still be hanging together come Monday morning," Rabobank currency strategist Jeremy Stretch said. The GBP/USD is currently trading at $1.5840 as of 8:33am, London Time.

The dollar rose against a basket of currencies on Monday extending sharp gains made late last week as U.S. Treasury yields rose to seven month highs, prompting investors to cover short-dollar positions. Smaller-than-expected job losses in the United States in May sparked concerns on Friday that the Federal Reserve may lift interest rates sooner than previously thought, helping push up Treasury yields, dealers said. "The market is weighing how much more U.S. yields will rise and how they will impact the U.S. stocks and the economy," said a senior trader at a Japanese bank. Some market players fretted that the rise in Treasury yields could hurt US equities, which in turn could encourage investors to buy the dollar back to reduce risk exposure. The EUR/USD is currently trading at $1.3890 as of 9:00am, London Time.

Former Bank of England policy maker David Blanchflower said the central bank may expand and widen its program of buying assets with newly created money as the British economy keeps shrinking. The bank may seek to spend more than the 150 billion pounds ($240 billion) authorized by Prime Minister Gordon Brown’s government, as well as buying different types of bonds, Blanchflower said in an interview on Bloomberg Television. Britain will be mired in a recession for another year, he said. “My expectation would be: look at the data, and if the data is not strong and growth isn’t coming, they could do more,” Blanchflower said. “They may decide they have to alter the type of gilts they’re buying or do rather more in commercial paper, but it’s really going to depend.”

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Published on  Mon, Jun 8 2009, 10:52 GMT

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