U.K.'s Darling sees worst conditions in 60 years
The beleaguered British pound accelerated its recent fall, plunging to its lowest level against the U.S. dollar since April 2006 after U.K. Chancellor of the Exchequer said the economic environment is the most difficult in 60 years.
"[The times we're facing] are arguably the worst they've been in 60 years. And it's going to be more profound and long-lasting than people thought," Darling said in an interview published in Saturday's Guardian newspaper.
The remarks painted a much gloomier economic outlook than had previously been portrayed by Darling or other government officials, including Prime Minister Gordon Brown.
News reports said the interview caused tensions between Brown and Darling. Darling later emphasized that he had been speaking in terms of the global economic backdrop.
Still, the remarks stand in contrast to Darling's optimism in the spring budget when he said Britain was better placed than other economies to withstand the global slowdown.
Meanwhile, the comments were "heaping downside pressure" on sterling Monday, said James Hughes, currency strategist at CMC Markets.
The pound plunged in Asian trading and extended losses later in the day to change hands against the dollar at $1.7995, according to FactSet -- a loss of more than 1.5%on the day and the first time the pound has fallen below the $1.80 level since April 2006. The pound had traded above $2.01 as recently as July.
The euro had earlier soared to a new all-time high against sterling, touching 81.26 pence in morning trade. The European single currency remained 0.7% higher against the pound at 80.94 pence.
Simon Derrick, a currency strategist at Bank of New York Mellon, said talk of political tensions will likely overhang Brown's efforts to "re-launch" his premiership with a series of economic measures and would be likely to cause investors to continue to shun the pound "for some time to come."
"We are reminded once again that when the [British pound] falls, it falls hard," Derrick wrote.
The fall, however, has left the dollar/pound currency pair technically oversold on the relative strength index, or RSI, noted Naeem Wahid, currency strategist at HBOS.
Meanwhile, commitments-of-traders data showed speculators holding the largest net-long dollar positions versus the pound since at least 1992 in the futures market, raising the risk sterling could see a near-term squeeze higher, Wahid wrote.
Downbeat data
Meanwhile, British economic data remained largely downbeat.
The CIPS/Market U.K. purchasing managers index for the manufacturing sector came in at 45.9, up slightly from the nine-and-a-half year low of 44.1 set in July. A reading of less than 50 indicates a contraction in the sector, while a reading of more than 50 indicates expansion.
The Bank of England reported that July mortgage approvals totaled 33,000, down from a downwardly revised 35,000 in June and setting a new all-time low for the statistical series, which began in 1993.
Still, with inflation running well above the 2% target, the Bank of England's Monetary Policy Committee is likely to remain on the sidelines when it meets Thursday, Wahid said, leaving its bank rate unchanged for the fourth consecutive month at 5%.
"The bank rate is likely to remain unchanged this week -- the MPC will only be able to cut the bank rate once inflation begins a downward trajectory," Wahid said.
Yen up sharply but trims gains
The Japanese yen, meanwhile, was sharply higher against major counterparts, but trimmed gains in afternoon trade after Japanese Prime Minister Yasuo Fukuda announced he would resign in a surprise announcement. See full story.
The dollar remained down 1.2% against the Japanese currency to 108.11 yen. The euro was 1.9% lower at 157.87 yen, notching a five-month low.
Strategists said rising risk aversion has cut into the appetite for carry trades.
A sharp sell-off in Korean equities has put the Korean won under pressure and forced investors to abandon a popular carry trade, said strategists at BNP Paribas.
In a carry trade, traders borrow funds in a low-yielding currency, and then buy assets denominated in a higher-yielding currency.
A sharper-than-expected 1.5% decline in July German retail sales provided further evidence the euro-zone's biggest economy continues to weaken, wrote economists at Capital Economics.
The European Central Bank is expected to leave its key rate on hold at 4.25% when its rate-setting governing council meets on Thursday. The ECB is also wrestling with above-target inflation.
Monday's data, however, show "further signs of weakness in the euro-zone economy, which appears to be spreading north," the Capital Economics economists wrote. "These signs should eventually convince the ECB that underlying inflation will remain relatively subdued and we expect interest rates to fall to 3% by the end of next year."
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