Pound Falls Below $2 as Northern Rock Woes Fuel Bank Concern

By Gavin Finch

Sept. 17 (Bloomberg) -- The pound fell below $2 for the first time in almost three weeks as Northern Rock Plc depositors queued to withdraw their savings for a third day, sending the U.K. mortgage lender's shares to a seven-year low.

The U.K. currency also dropped to its weakest in 14 months against the euro as former Federal Reserve Chairman Alan Greenspan said Britain faces greater mortgage and banking difficulties than the U.S., according to the Daily Telegraph. Citigroup Inc. downgraded nine European banks, including the U.K.'s Bradford & Bingley Plc and Alliance & Leicester Plc.

``The outlook for the pound is not pleasant,'' said Hans Guenter Redeker, head of currency strategy at BNP Paribas SA in London. ``We're getting into new waters concerning the housing market. It looks vulnerable. That's having a significant impact on sterling.''

The pound fell to the lowest since Aug. 22 and traded at $1.9963 by 10:35 a.m. in London, from $2.0074 on Sept. 14. It also slipped to 69.45 pence per euro, after trading at the lowest since July 2006, from 69.13 pence last week.

The pound has fallen against the 16 most-traded currencies since Northern Rock, the U.K.'s third-largest mortgage provider, sought emergency funding from the Bank of England on Sept. 13. The lender relies on the capital markets rather than deposits for nearly three-quarters of its funds.

Subprime mortgage losses in the U.S. have driven borrowing costs higher around the world as traditional lenders curtailed loans to all but the safest institutions. The U.K. currency posted its biggest decline in two years versus the euro last week.

``Sterling fell on the back of mortgage-lender distress,'' said Jan Loeys, global head of market strategy at JPMorgan Securities in London.

Gilts Advance

Gilts rose as declining stocks boosted demand for the safety of government debt. The yield on two-year notes fell to a nine-month low today and was recently 6 basis points lower at 5.01 percent. The yield on 10-year bonds dropped 5 basis points to 4.82 percent.

U.K. government bonds are outperforming European debt on speculation the central bank won't be able to raise interest rates from 5.75 percent by year-end. The extra yield investors demand for holding 10-year gilts over the equivalent German bund fell to 67 basis points, near the lowest since July last year.

The yield on the December interest-rate futures contract has fallen 25 basis points since Sept. 13 to 6.05 percent, signaling investors are paring bets the Bank of England will increase borrowing costs.

The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the central bank's key rate for the past decade.

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