Pound Slides as U.K. Political Turmoil Flares `Brexit' Concerns

  • Ex-Tory leader Duncan Smith is prominent `Brexit' supporter
  • Leaving EU to cost Britain 100 billion pounds by 2020: CBI

The pound fell from a one-month high versus the dollar after a senior member of the U.K. government resigned on Friday, deepening the rift in the ruling Conservative party just three months before the referendum on Britain’s European Union membership.

Sterling weakened against all but one of its 16 major peers and was the worst performing currency among Group-of-10 nations after New Zealand’s dollar. Iain Duncan Smith, a former leader of the Conservatives and a prominent figure supporting the campaign for Britain to leave the EU, a so-called “Brexit,” criticized the government on its proposed cuts to disability benefits while taxes for higher earners and companies were being decreased.

The difference in a measure of volatility in the pound versus the dollar over the next 12 months and the equivalent gauge in the euro against the U.S. currency rose to the most in more than seven years on Monday.

The British currency was also weighed down by a report from the Confederation of British Industry that said leaving the EU would cost the U.K. 100 billion pounds ($144 billion) in lost economic output and 950,000 jobs by 2020. The referendum is scheduled for June 23.

The pound “trended weaker against the dollar and euro due to the political trembling over the weekend,” analysts at Royal Bank of Canada in London, including senior U.K. economist Sam Hill, wrote in a note to clients. The CBI study “suggesting that the U.K. would be significantly worse off under an EU exit scenario” also hurt sterling, they wrote.

Pound Slides

The pound fell 0.5 percent to $1.4399 as of 4:06 p.m. London time, after climbing to $1.4514 on March 18, the highest since Feb. 16. Sterling weakened for the first time in three days versus the euro, dropping 0.4 percent to 78.18 pence.

The spread between the one-year implied volatility, a measure of price swings based on options, in the pound versus the dollar and that on the euro against the greenback climbed to 2.27 percentage points, its highest since December 2008 on a closing-price basis.

“Ultimately it’s going to be a volatile period for sterling,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “We don’t know what the upshot of Iain Duncan Smith’s resignation will be, but clearly the reaction in the market is the increase in uncertainty.”

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