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Pound plunges on UK lender worries

THE British pound unexpectedly stole the show as the heaviest loser in Asia yesterday, ahead of a key US interest rate decision later this evening.

Traders reported that the pound fell back below US$2 for the first time in more than a fortnight, tumbled to a fresh 14-month low versus the euro, and slid to its weakest in a month versus the Singapore dollar – punished by news late last week that a British mortgage lender called Northern Rock had to seek Bank of England assistance for longer-term funding.

The currency’s woes accelerated at the European open yesterday on news that Northern Rock’s share price had fallen by more than a third. By the Asian close, the British unit was one per cent worse off at US $1.9975, 0.9 per cent weaker at 69.4 pence per euro and 0.7 per cent softer at S$3.0286.

The most conspicuous feature of the British mortgage lender’s funding problems has become an all too familiar one these days.

While, according to British regulators, Northern Rock is still solvent, the bank had been over-reliant on short-term inter-bank funding for its longer term loan assets. When access to such funds dried up in recent weeks, it was forced to secure funding directly from the Bank of England.

British investment bank Barclays Capital researchers cited a BBC report that Northern Rock had rapidly expanded its share of the UK mortgage market over the past year. It reportedly has total assets in excess of £100 billion (S$302 billion), against retail deposits of something like £24 billion.

The upshot was that the pound finished the day worst-hit versus the US dollar despite a widespread belief that the US Federal Reserve’s interest rate committee will trim its official short term interest rate later tonight.

Fed-watchers have forecast that it may trim its 5.25 per cent Fed funds interest rate by a quarter to half a per cent in response to an unhappy combination of worries traceable to the troubled US housing sector and the unexpected news of US job losses last month – not to mention the weaker than expected August retail sales number reported last Friday evening.

Elsewhere in Asia, Wall Street’s indifferent performance last Friday combined with news of weaker European stocks yesterday to punish selected Asian bourses – and in turn their currencies – yesterday. This notwithstanding a heroic bounce in Chinese stocks which blithely brushed aside news late last week of a fifth Chinese interest rate hike this year.

Conspicuous stock market-related losers yesterday included the Singapore and Taiwan dollars. By the Asian close, the greenback was between 0.2 and 0.3 per cent firmer at S$1.5162 and NT$33.12.

Further north, in contrast, Japan’s Nikkei stock index recorded a gain of almost 2 per cent as the US dollar attempted to push its way back above 115 yen for a third consecutive session.

Down Under, carry trades in favour of the Australian dollar and New Zealand dollar were also trimmed as the pound lost ground, traders suggested – leaving them 0.2 and 0.5 per cent worse off at 83.84 US cents and 70.94 US cents respectively.

 

Source: Business Times 18 Sept 07

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