Pound Falls on Political Concerns

The British pound fell for the sixth straight day against the dollar on investor concerns that British voters may fail to elect a government capable of cutting the nation’s rising deficit.  Recent polls showed declining support for the Conservative party putting the UK on track for its first minority government since 1974. Jeremy Stretch of Rabobank International in London stated, “New U.K. opinion polls are re-emphasizing the political dynamic, which is a sterling negative. Investors will prefer the safer haven of the dollar in this type of environment.”  Recent polls showed the conservative lead at 2 percentage points suggesting that Prime Minister Gordon Brown’s Labour Party will most likely retain power. Brown’s Labour government is selling record amounts of debt to finance various stimulus programs which were introduced to help the UK economy recover from the deepest recession since World War Two. Last December the UK increased gilt sales Hans-Guenter Redeker of BNP Paribas SA told Bloomberg television, “It looks like we might have a government which is not going to be driven by a broader majority, and under those circumstances, the possibility of having a successful and decisive budget consolidation is very slim.” Some experts are predicting that the pound could fall as low as $1.20 and possibly reach parity with the euro.

Greece to Announce More Cuts

Currency markets have been paying very close attention to the ongoing Greek fiscal crisis and on Tuesday the euro rose slightly against the US dollar after the Athens government said it will announce new austerity measures and debt cuts on Wednesday. The euro rose 0.2% to $1.3588 and against the pound gained 0.3% trading at 90.74. Dean Popplewell of Oanda Corp said, “The euro spiked up on the news from Greece. Greece is basically having to appease the European Union and the euro is very much holding its own.” The Athens government bowing to pressure from the EU and investors is expected to announce 4.8 billion euros ($6.5 billion USD) in budget cuts tomorrow.

EU Insists on Further Austerity Measures

EU Monetary Affairs Commissioner Olli Rehn said that the Athens government must announce new austerity measures “in the coming days” as some EU officials believe that current measures are not enough to lower the nation’s massive deficits. The announcement would come in advance of a meeting between German Chancellor Angela Merkel and Greek Prime Minister George Papandreou. The measures could help Merkel overcome widespread public and political opposition to aiding Greece. In a note to clients Norbert Aul of Commerzbank AG said, “Developments surrounding Greece are still driving the European government bond markets. The market seems to still believe that help for Greece might be around the corner.”