Pound Slides to 13-Month Low Against Dollar on U.K. Government Budget Woes

The pound fell to a more than 13- month low against the dollar after U.K. Prime Minister David Cameron said the government discovered “very bad” spending decisions by the previous administration.

The U.K. currency weakened against 13 of its 16 most-traded peers after Cameron said on BBC television yesterday that he’d seen “very bad practice, spending decisions taken in the last year or so of a Labour government that no rational government would have done.” Chancellor of the Exchequer George Osborne said he will give details of an emergency budget on June 22. A report also showed London home prices fell in May for the first time this year.

“Sterling’s under pressure as investors shy away from risk-orientated currencies,” said Jeremy Stretch, a senior strategist at Rabobank International in London. “The issues relating to the potentially worse state of the public finances don’t augur particularly well.”

The pound fell 0.5 percent to $1.4467 at 3:37 p.m. in London, having reached $1.4252 earlier, the lowest since March 31, 2009. Sterling depreciated 0.6 percent to 85.51 pence per euro.

“To get the finances back on track, that means more austerity than we were assuming, higher taxes and more spending cuts,” Stretch said. “It’s not particularly constructive for sterling.”

‘Immediate’ Cuts

Concern the U.K. will struggle to narrow the deficit, which at more than 11 percent of gross domestic product is biggest in the Group of Seven nations, has helped send the pound 5.1 percent lower this year, according to Bloomberg Correlation- Weighted Indexes.

The incoming chief secretary at the U.K. Treasury, David Laws, found a note last week from his predecessor, Liam Byrne, that read: “Dear Chief Secretary, I’m afraid to tell you there’s no money left.”

The note was “honest,” Laws, the No. 2 in the Treasury, told a press conference in London today. “But slightly less than I was expecting.”

Speaking to reporters in London today, Osborne said there is a “strong” case for 6 billion pounds ($8.7 billion) of “immediate” cuts to tackle Britain’s budget deficit. “We’re in no doubt this action is advisable” and is necessary to provide economic stability and secure the recovery, he said.

Fiscal Watchdog

Osborne also announced a new independent fiscal watchdog, the Office of Budget Responsibility, to be chaired by former Bank of England policy maker Sir Alan Budd. The OBR will calculate economic forecasts, which Osborne will use in preparing budgets.

Investors should sell the pound against the yen because the U.K.’s coalition government will impose “brutal” spending cuts, while a decline in stocks will boost demand for Japan’s currency, BNP Paribas SA said.

BNP recommended investors put on so-called short positions on the pound with a target of 125 yen, analysts led by Hans- Guenter Redeker in London wrote in a research note today.

The pound fell for a fourth consecutive day against the yen, slumping as much as 2.5 percent to 131.10. The pound may decline about 6 percent against the dollar, to $1.35 by year-end, the BNP analysts wrote.

The average house price in the U.K. capital fell 0.4 percent from April, Rightmove Plc said today.

The U.K.’s inflation rate remained above the Bank of England’s upper limit of 3 percent in the year to April. Consumer prices are forecast to climb by 3.5 percent from a year earlier, according to the median forecast of 27 economists in a Bloomberg News survey. The Office for National Statistics will release the data tomorrow.

Government bonds fell, with the 10-year gilt yield rising one basis point to 3.75 percent. The two-year yield increased less than one basis point to 0.92 percent.

The Debt Management Office sold 1 billion pounds of 4.25 percent gilts maturing in 2032 at a yield of 4.38 percent today. Investors bid for 1.93 times the amount of securities on sale, according to the debt office’s website.

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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