Political fears cause pound to plummet

FOREIGN exchange markets were yesterday spooked by the prospect of a hung parliament, after a raft of polls suggested political stalemate following the general election.

Sterling plunged into crisis, tumbling as much as three per cent against the US dollar and broke through the key $1.50 level to hit $1.4780. The pound was also knocked to a three-month low against the euro of £0.9148.

Yields on the benchmark 10-year Treasury gilts spiked to 4.09 per cent as investors demanded greater compensation for holding UK debt.

Nick Beecroft, senior FX Consultant at Saxo Bank, said: “So long as the markets could harbour some hope that the next government would be a fiscally prudent, business-friendly Conservative one, the pound was able to just about hold its own against the euro. But polls predicting... a hung parliament, put paid to that dream.”

He forecasts sterling to fall as low as $1.40 within a month before plummeting to $1.20 by the summer on the back of deflation and sovereign debt concerns.

BNP Paribas’ Hans-Guenter Redeker said that relatively high gilt yields were no longer supporting sterling because they reflected the reassessment of the sovereign risk rather than better economic growth prospects.

He added: “Markets have focused on debt and deficit levels with sterling increasingly trading like an emerging market currency.”

The pound has lost nearly 10 cents against the dollar in little more than a week, putting upward pressure on petrol pump prices and adding to import costs for businesses.