Pound Declines on Concern New Government Will Struggle to Reduce Deficit

The pound fell against the dollar and the euro, snapping a two-day gain, on concern the U.K.’s new coalition government will struggle to agree on policies to cut the nation’s record budget deficit.

Sterling weakened from near a 10-month high versus the euro on speculation Conservative leader David Cameron and Liberal Democrats leader Nick Clegg will fail to fulfill pledges made to cut government debt that Standard & Poor’s says will rise to 77 percent of gross domestic product this year. The U.K. currency gained yesterday when Cameron replaced Gordon Brown following five days of talks after the May 6 elections.

“There are real underlying differences between the two” parties, said Adrian Foster, head of financial-markets research for Asia at Rabobank Groep NV in Hong Kong. “How are they going to agree on a set of policies when they both have quite different opinions on different things? It’s unlikely there’ll be any positive drivers from the U.K. political scene for the pound for the next couple of weeks at least.”

The U.K. currency dropped to $1.4897 as of 6:39 a.m. in London from $1.4956 in New York yesterday when it gained 0.7 percent. It weakened to 84.71 pence per euro from 84.66, after climbing to 84.28 on May 6, the strongest since June 22.

The yield on the benchmark 10-year gilt was unchanged at 3.88 percent in London.

Even after the Conservatives’ biggest electoral gain since 1931, Cameron had to strike a deal with the Liberal Democrats in order to oust the Labour Party’s Gordon Brown. Cameron late yesterday announced he had reached a deal with the Liberals to form the coalition.

The leaders of the coalition will propose 6 billion pounds ($8.93 billion) of cuts within 50 days to reduce the budget deficit, raise the threshold to pay income tax, study a split between retail and investment banking and increase the Bank of England’s oversight of the financial industry, Conservative officials said.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net.

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