April 24 (Bloomberg) -- The pound dropped against most of the other major currencies as Moody’s Investors Service said the U.K.’s finances are “deteriorating rapidly” and the economy shrank the most since 1979.

The yen rose to the strongest level versus the dollar this month as Nikkei English News said authorities will limit the leverage on foreign-exchange margin trading, reducing demand for Japan’s currency as a source of funding for investments in higher-yielding assets.

“The pound is suffering with policies creating long-term negative issues,” said Jack Iles, a money manager in Boston at MFC Global Investment Management, with $2.5 billion under management.

The pound depreciated 1.1 percent to 90.26 pence versus the euro at 11:52 a.m. in New York, from 89.29 yesterday, after touching 90.82, the weakest level since April 9. Sterling traded at $1.4711, compared with $1.4722. The yen advanced 0.7 percent to 97.29 per dollar from 97.96 after reaching 96.64, the strongest level since March 30. The dollar lost 1 percent to $1.3277 per euro from $1.3144. The euro advanced 0.2 percent to 129.01 yen from 128.77.

Sterling was headed for a 2.7 percent drop versus the euro this week, the biggest five-day decline since mid-March. It was down 0.6 percent versus the dollar. The euro was poised for a weekly gain of 1.8 percent versus the dollar. The yen appreciated 2.2 percent versus the dollar and 0.2 percent against the euro.

U.S. Automakers

The dollar slid on concern Chrysler LLC and General Motors Corp. may file for bankruptcy, dropping 1.5 percent to 57.01 U.S. cents versus New Zealand’s currency and falling 1.9 percent to 8.1258 Swedish kronor.

The U.S. Treasury Department is preparing a bankruptcy filing for Chrysler only as a matter of “due diligence,” Michigan Senator Debbie Stabenow said in an interview. GM must restructure debt and win union concessions by June 1 or be forced into a government-backed bankruptcy.

The euro-dollar exchange rate may have “room for additional upside” after rising above the resistance area of $1.3090 to $1.3125, Niall O’Connor, New York-based currency technical analyst at JPMorgan Chase & Co., wrote in a research note to clients today. The next level of resistance, where selling orders cluster, is $1.3360, he wrote.

“The overall dollar picture has certainly shifted over the past few days with the weak tone developing,” O’Connor wrote.

Weaker Pound

The pound fell against all of the 16 most actively traded currencies tracked by Bloomberg except the Mexican peso after analysts at Moody’s including Arnaud Mares in London wrote in a report yesterday that Britain’s “balance sheet is deteriorating rapidly” and the “government is taking risks with public finances.” Britain’s Aaa rating isn’t immediately under threat, Moody’s added.

U.K. gross domestic product fell 1.9 percent in the first quarter, the biggest contraction since Margaret Thatcher became prime minister in 1979, after declining 1.6 percent in the previous quarter, the Office for National Statistics said today.

“It’s a pretty nasty cocktail for the pound,” said Adam Cole, head of global foreign-exchange strategy at RBC Capital Markets in London. “Weak data and concerns about budget conditions leading to ratings downgrades are putting pressure on the currency.”

Sterling Versus Dollar

The pound lost 26 percent versus the dollar and 12 percent versus the euro over the past year. The weekly dollar-pound exchange rate averaged about $1.67 over the past 20 years, 14 percent higher than the current price, leading some analysts to conclude sterling is undervalued.

“We think the pound will be the strongest currency over the next 12 months,” said Roddy Macpherson, investment director in Edinburgh at Scottish Widows Investment Partnership Ltd., which manages about 87 billion pounds ($128 billion). “The recovery of the U.K. economy will take place in the first half of next year, and the central bank will start to tighten.”

Japan’s currency climbed after Nikkei English News reported that the Financial Services Agency limited the leverage on currency margin trading to between 20 and 30 times an investor’s initial principal, compared with a typical level of 100 to 600 times, said Nikkei, citing an agency official.

“The yen is being bought as a knee-jerk reaction,” said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. “Combined with a slightly elevated level of risk aversion, we’ll see the yen crosses remain well-supported in the months ahead.”

Carry Trade

Margin traders held about 25 percent of the leveraged bets against the yen at the height of the carry trade in 2007, Hardman said. The yen will trade closer to 95 than 100 per dollar in the next couple of months, he said.

The euro gained versus the dollar after a report showed German business confidence advanced from a 26-year low in April. Germany’s Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 83.7 from 82.2 in March. Economists expected a gain to 82.3, the median of 36 forecasts in a Bloomberg News survey showed.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: April 24, 2009 12:01 EDT