June 6 (Bloomberg) -- The pound had its biggest weekly decline in three months against the dollar as Prime Minister Gordon Brown rearranged his cabinet amid a series of resignations and calls for him to step down.

The British currency dropped yesterday to its lowest level since May 28 after six ministers quit and results from U.K. local elections showed Brown’s ruling Labour Party lost more than 100 seats of the more than 2,000 contested. The pound also weakened as mining company Rio Tinto Group scrapped an investment from Aluminum Corp. of China and the Bank of England left its key interest rate unchanged.

“The pound is currently a sell,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. “A Brown resignation and the demise of the Labour party will, longer term, prove to be a pound positive, so I would suggest selling the pound now but leave bids once the dust has settled on a Brown resignation.”

The pound slid to $1.5981 in London yesterday after dropping to $1.5941, its lowest level since May 29, bringing its drop this week to 1.29 percent. The U.K. currency strengthened to 87.40 pence per euro, little changed from 87.47 pence at the end of last week.

Brown attempted to breathe new life into his government by reshuffling his leadership team. Alan Johnson, the favorite to replace the prime minister, was promoted to manage the Home Office and pledged his loyalty to Brown. Alistair Darling remains chancellor of the exchequer, dashing a plan to install Brown’s ally Ed Balls in the job.

Pared Decline

“The political situation is weighing on the pound,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp.

The British currency pared declines yesterday after a report showed the U.S. lost fewer jobs than forecast in May, even as the jobless rate jumped to 9.4 percent, the highest level since 1983.

The pound advanced almost 10 percent this year against the dollar as government efforts to revive Europe’s second-largest economy showed signs of bearing fruit. Consumer demand rose more than expected last month, Nationwide Building Society reported June 3 and service industries grew, according to a survey by the Chartered Institute of Purchasing and Supply and released by Markit. U.K. house prices unexpectedly rose 2.6 percent from April, Lloyds Banking Group Plc’s Halifax division said June 4.

The Bank of England’s nine-member Monetary Policy Committee left the nation’s main rate at 0.5 percent and said it will refrain from spending more than the 125 billion pounds already pledged on buying assets to boost the economy.

Goldman Sachs Group Inc. advised investors on June 3 to drop bets the U.K. currency will gain against the dollar after the pound reached its $1.65 target.

Relative Strength Index

Sterling’s 14-day relative strength index, a chart used by traders to predict changes in price direction, rose to 83.5 this week. A level above 70 typically indicates an asset is poised to fall. The index dropped below 60 yesterday.

Rio Tinto, the world’s third-biggest mining company, rejected an investment from Aluminum Corp. of China, or Chinalco in favor of raising $21 billion from a share sale.

Standard & Poor’s lowered its outlook on the U.K.’s AAA credit rating to “negative” from “stable” on May 21, citing the government’s deteriorating finances. The nation faces a one- in-three chance of a downgrade, S&P said, potentially making it more expensive for Britain to fund its record debt load.

The government sold 5.5 billion pounds of gilts this week, part of the record 220 billion pounds it’s offering in the fiscal year through March 2010.

Government bonds fell this week, with the yield on the 10- year gilt rising 18 basis points to 3.92 percent. The two-year yield jumped 24 basis points to 1.31 percent, the most since the five days ended Oct. 17.

Gilts lost 3.5 percent this year through yesterday, according to Merrill Lynch & Co.’s U.K. Gilts Index. That compares with declines of 1.5 percent for German government debt and 5.3 percent for U.S. Treasuries, Merrill’s German Federal Governments and U.S. Treasury Master indexes show.

The U.K.’s FTSE 100 Index climbed 1.2 percent yesterday, capping its third weekly gain.

To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.net

Last Updated: June 6, 2009 03:16 EDT