Pound Drops For a Second Week After Conservatives Fall Short of Majority

The pound fell for a second week against the dollar after the U.K. election failed to produce an outright winner and stocks slumped worldwide on concern Europe’s debt crisis will worsen.

Sterling sank to a 13-month low against the U.S. currency and gilts dropped yesterday after David Cameron’s Conservatives fell more than 30 seats short of winning a majority in Parliament. Losses on 10-year government bonds pushed the yield up by the most since October yesterday. Britain’s currency also slid as a report showed house prices fell last month, fueling concern the economic recovery may falter.

“The Conservatives were expected to do a bit better than this,” said Harry Adams, a currency trader at Schneider Foreign Exchange in London. “Ultimately, markets don’t like uncertainty and we have a lot of it here. I don’t see this being sorted out quickly.”

The pound fell 3.5 percent this week to $1.4735 as of 5 p.m. in London yesterday, adding to a 0.7 percent decline in the five days through April 30. It was at 86.33 pence against the euro from 87.05 a week earlier. Sterling plunged as much as 3.5 percent versus the common European currency yesterday.

Sterling has declined about 4.9 percent this year, Bloomberg Correlation-Weighted Currency Indexes show, partly as investors sought the safest assets on concern about sovereign debt loads amid Greece’s fiscal crisis. The FTSE 100 Index retreated to near a three-month low yesterday.

The pound may extend losses before the Bank of England announces its latest decision on interest rates and asset purchases on May 10. The central bank cut its main rate to a record low of 0.5 percent and started buying 200 billion pounds ($294 billion) of gilts in March 2009 in an attempt to further depress borrowing costs and revive the economy.

Seat Count

It’s the first election since 1974 where no party gained a majority. Cameron’s Conservatives won 306 seats to 258 for Labour and 57 for the Liberal Democrats. One district, previously held by the Conservatives, will only vote on May 27 after the death of a candidate during the campaign.

Investors demanded an extra 1.03 percentage point, or 103 basis points, to hold 10-year gilts rather than German bunds yesterday, according to Bloomberg generic data. The difference in yield, or spread, was 57 basis points on Jan. 4.

“People are increasingly taking fright as to the unfolding political backdrop,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “Sterling is reacting accordingly as well.”

The last time the U.K. had a hung parliament it took four days for Conservative Edward Heath to quit as premier. Labour’s Harold Wilson was then named to lead a minority government.

The Conservatives have pledged to cut the deficit more quickly than the other parties. Conservative economics spokesman George Osborne said April 21 that the U.K. could be forced to appeal to the International Monetary Fund for a bailout if the election produced an indecisive result. The deficit is more than 11 percent of gross domestic product, the biggest in the Group of Seven.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.

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