The pound fell against the dollar and the euro this past week as the credit-market crunch prompted traders to pare bets the Bank of England will rates interest rates again this year. The U.K. currency also dropped versus the yen as two of Europe’s biggest banks said they were affected by the spreading subprime crisis and as stocks fell around the world. The European Central Bank added cash to the money markets for a second day yesterday, “to assure orderly conditions.”
“The wider the spillover from the credit market, the greater the risk the economy slows down,” said Jeremy Stretch, senior currency strategist at Rabobank Groep in London. “The continued uncertainty will make the BOE more reticent, and sterling looks vulnerable.”
Against the dollar, the pound traded at $2.0259 by 5:22 p.m. yesterday in London, from $2.0233 on Aug. 9 and $2.0409 at the end of last week. The currency fell for a third week against the euro, to 67.62 pence from 67.50 pence Aug. 3.
Against the yen, the pound traded at 240.18 yesterday, from 240.94 a week earlier.
Futures trading showed investors pared wagers on one more increase in U.K. borrowing costs by year-end.
The implied yield on the December interest-rate futures contract dropped 5 basis points this past week to 6.10 percent.
King Optimistic
Bank of England Governor Mervyn King said Aug. 8 he’s optimistic turmoil in the credit markets won’t derail Britain’s economy or its financial system.
The overnight deposit rate for the pound rose yesterday, while similar rates in Europe and the U.S. fell after the ECB and the Federal Reserve added temporary cash to the banking system.
“The BOE may not want to be seen as overreacting or want to panic the market further,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “But I wouldn’t be surprised if they did something on Monday.”
Gilts rose as investors sought the safety of government debt. The yield on the 4 percent note due March 2009 fell 4 basis points on the week to 5.54 percent. Yields move inversely to bond prices.
Concern the credit woes were spreading drove up corporate risk premiums in Europe, according to traders of credit-default swaps.
Contracts on the iTraxx Europe Index of 125 companies rose 3.5 basis points to 51 basis points yesterday, according to JPMorgan Chase & Co. That indicates worsening perceptions of credit quality. The risk of holding corporate debt fell during the previous week.
Market `Whipsawing’
“The market seems to be wildly vacillating from bouts of optimism about the whole credit derivative situation, to bouts of pessimism,” said Steve Barrow, chief currency strategist at Bear Stearns Cos. in London. “This is whipsawing the market.”
Deutsche Bank AG’s DWS unit, Germany’s biggest mutual fund company, said yesterday the value of one of its non-subprime related funds has fallen 30 percent since the end of July.
BNP Paribas SA, France’s biggest bank, this week froze three asset-backed securities funds, and NIBC Bank NV in the Netherlands posted losses from U.S. credit investments.
The pound fell against the yen this past week as investors unwound so-called carry trades, where they borrow in the Japanese currency and use the funds to buy higher-yielding U.K. assets.
“Credit spreads will likely widen as risk-aversion reappears,” said Tom Vosa, head of market economics at National Australia Bank in London.
The Bank of England’s benchmark rate of 5.75 percent is the highest among the Group of Seven countries, and the BOE signaled in its quarterly inflation report Aug. 8 that it may increase borrowing costs further. Britain’s central bank will release the minutes of its Aug. 2 rate-setting meeting on Aug. 15.
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