Jan. 26 (Bloomberg) -- Knowing the pound has tainted almost every British prime minister for four decades, Gordon Brown has so far avoided addressing sterling’s plunge to a 23-year low.

Mounting complaints at home and abroad may force him off the fence -- with few good options as his poll numbers sink along with the British economy.

“It has certainly undermined prime ministers before,” said Philip Whyman, professor of economics at the University of Central Lancashire. “It could do for Brown.”

John Major, James Callaghan and Harold Wilson each had to cope with currency-market turmoil that weakened their reputation for managing the economy. A dispute over aligning with other European currencies forced Margaret Thatcher to resign in 1990.

Brown dodged questions about the pound as it fell by a third against the dollar and euro in the past year. Dragged down by a recession, a banking crisis, the lowest interest rates in history and surging government debt, the U.K. currency’s weakness may begin to rub off on him.

“In the short term, people pay very little attention to the price of sterling,” said John Thurso, a Liberal Democrat lawmaker on Parliament’s Treasury Committee. “But when it becomes the first item on the news, it says to them the value of your country is declining. Your country is vanishing.”

The pound, which exceeded $2.11 in November 2007, dropped to $1.35 on Jan. 23, the weakest since 1985, after the government confirmed the economy tipped into recession in the second half of last year. It traded as low as $1.359 today.

A euro now buys almost 95 pence, up from as little as 65 pence in January 2007.

‘Cascading Further’

The rout may not be over.

“If sterling breaches parity, the danger is it could start cascading further downwards,” said Philip Shaw, chief economist at Investec Securities in London, noting the proximity of the U.K. currency to 1 euro. “It’s a big psychological level.”

So far, Brown, 57, has rebuffed complaints about the pound. He branded the Conservatives “highly irresponsible” when they raised the issue in November. He brushed off European finance ministers including Ireland’s Brian Lenihan and France’s Christine Lagarde when they urged him this month to intervene.

Britain’s currency withered as the recession began in the third quarter and the Bank of England cut its key lending rate to 1.5 percent, the lowest since 1694 and half a point below the European Central Bank’s level. The government deficit will touch 9.6 percent of gross domestic product in 2010, the most in the European Union, as Brown pays for bank rescues and tax cuts.

Past Crises

In past sterling crises, both Labour and Conservative prime ministers put the government at center stage. Those efforts backfired.

Major tried and failed to keep the pound pegged to other European currencies, then allowed it to tumble by a third in 1992. He lost the next election in 1997 to Tony Blair, who brought in Brown as his finance minister. Thatcher saw the pound’s strength as a mark of Britain’s economic virility and was forced out after a Cabinet argument on the matter.

Callaghan had to ask the International Monetary Fund for a loan in 1976 after the currency fell by 14 percent. He wasn’t reelected. Wilson, with Callaghan as his chancellor, devalued the pound in 1967, costing him the election three years later.

Now opposition parties are pushing the responsibility closer to Brown, who didn’t express a point of view when the pound surged to its 2007 record highs.

Even if he wanted to do something, his options are limited.

Raising interest rates would hurt the economy. With 594.3 billion pounds in debt, the Treasury doesn’t have the cash to support sterling.

Conservative View

Conservative leader David Cameron says he’s worried investors are concluding that Treasury borrowing is unaffordable and selling the pound as a result. He suggests the U.K. may need another IMF rescue.

“The government is borrowing too much,” Cameron, 42, said on Jan. 23. “I have been warning the prime minister about this.”

Brown argues that day-to-day fluctuations in currencies don’t trouble him.

“British policy is not based on targeting the exchange rate,” Brown said after a speech in London today. “It is based on targeting inflation through interest rates. It is low inflation that is absolutely central to the policy we’re pursuing.”

Oil and Banking

He has dismissed Jan. 20 comments by Jim Rogers, chairman of Singapore-based Rogers Holdings, who said the pound was “finished” because of turmoil in the banking system and a decline in North Sea oil output.

“If you think we’re going to build our policy around comments from speculators who want to make money, you’re very, very wrong indeed,” Brown told the BBC on Jan 23. Rogers later told Bloomberg Television the currency was “going to be under pressure” because the U.K. “hasn’t got much to sell to the world any more” and has “stupendous debts.”

The price of insuring against a U.K. default has risen to its highest ever level. The prime minister’s spokesman Michael Ellam on Jan. 20 said the market for sovereign credit-default swaps was “not very good.” He pointed instead to the yields on 10-year U.K. Treasury bonds, which are lower than those of France or Australia. The yield on those bonds has risen 66 basis points to 3.68 percent through January, even as the Bank of England cut benchmark borrowing rates.

Inflation Target

Since December, government ministers have answered questions about the pound by saying they target inflation and not the value of the currency.

Chancellor of the Exchequer Alistair Darling argued last year that the falling pound would help exporters as domestic demand slumped. City Minister Paul Myners made the same point last week in Parliament.

Manufacturers including Ford Motor Co., Nissan Motor Co. and Rolls-Royce Group Plc will benefit from the drop in the pound, which reduces the cost of cars and aircraft-engines they make in Britain. That impact, for now, is overwhelmed by the plunge in growth around the world.

“The fall in sterling isn’t the salvation of the U.K. economy,” said Danny Gabay, a former Bank of England economist and founder of Fathom Consulting, a London-based consultant. “It’s a symptom of its demise.”

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net

Last Updated: January 26, 2009 05:38 EST