March 1 (Bloomberg) -- The pound tumbled to the lowest in almost 10 months against the dollar and gilts fell as polls showed the U.K. may elect its first minority government since 1974, hampering efforts to cut the nation’s record deficit.
Sterling slid below $1.50 for the first time since May 8 and depreciated against all 16 of the most widely traded currencies as a poll showed the opposition Conservative Party has its smallest lead over the ruling Labour Party in more than two years. Elections must be held by June. Traders increased bets the pound will decline further against the dollar, according to the Washington-based Commodity Futures Trading Commission.
“The political development added to the negative sentiment about the pound,” said Audrey Childe-Freeman, a senior currency strategist at Brown Brothers Harriman Ltd. in London. “Political uncertainty means the risk of a hung parliament is increasing. You will need a government with a strong majority to push ahead with reforms that the U.K. needs. We are bearish on the pound.”
The pound dropped 1.6 percent to $1.4993 as of 10:56 a.m. in London from $1.5238 at the end of last week. It weakened earlier to $1.5097, the lowest level since May 14. Sterling depreciated 1.5 percent to 90.79 per euro from 89.46 pence last week, trading above 90 pence per euro for the first time since Jan. 12.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 62,884 on Feb. 23, compared with net shorts of 56,079 a week earlier, the figures from the CFTC on Feb. 26 showed.
Poll Declines
The U.K. currency has dropped in value by 7.4 percent against the dollar and 2.5 percent versus the euro this year as investors concern over fiscal austerity are heightened by the problems surrounding Greece’s budget deficit.
Poll declines for the Conservatives, who called for spending cuts to start this year, are making investors skeptical that citizens will elect a government strong enough to contain the budget deficit. At more than 12 percent of gross domestic product, the U.K. shortfall is on a par with that of Greece.
Turcan Connell, an Edinburgh-based money manager that caters to rich families, expects the pound to lose between 20 percent and 30 percent against the dollar. Concern that Greece won’t be able to cut its budget deficit helped send the euro 5 percent lower against the dollar this year.
‘Alarm Bells’
“Alarm bells were ringing in Greece for a long time and when it happened, it happened very quickly,” said Haig Bathgate, head of strategy at Turcan Connell. “The U.K. is in a similar predicament. It could be hit very hard.”
The 10-year gilt yield rose 4 basis points to 4.07 percent. The two-year note yield gained 5 basis points to 0.99 percent.
U.K. bond yields may rise faster relative to those in euro- denominated government debt given the election uncertainty, analysts at Deutsche Bank AG wrote in a report dated Feb. 26.
“From a sentiment perspective, if the concerns over peripheral Europe linger on, the spotlight will remain on U.K. fiscal consolidation measures,” wrote the analysts, including London-based Mohit Kumar.
Gilts were also pushed lower as German lawmakers said euro- area officials were creating a package to grant Greece about 25 billion euros ($34 billion) in aid should it need help financing its debt, damping demand for what investors consider safer government debt.
“The news on Greece unwinds the flight-to-quality demand to a degree,” said Jason Simpson, an interest-rate strategist at Royal Bank of Scotland Group Plc in London.
Bank of England policy makers voted last month to pause their bond-buying program after purchasing 200 billion pounds of securities to help revive the economy.
All 45 economists in a Bloomberg News survey expect the central bank to announce no extension to the program at Thursday’s policy meeting. All 60 economists in a separate Bloomberg survey estimate the Bank of England will keep its main interest rate unchanged at a record low 0.5 percent.
By Keith Jenkins and Anchalee Worrachate
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