Yen Trades Near Record High Versus Pound on U.K. Bank Concern

Jan. 22 (Bloomberg) -- The yen traded near a record high against the pound as speculation that the deepening financial crisis will force the British government to nationalize banks boosted the haven appeal of Japan’s currency.

Sterling erased its decline yesterday against the dollar after touching the lowest since Margaret Thatcher was prime minister as equities climbed and Reuters reported the Group of Seven may discuss the pound’s slump. The dollar dropped to the lowest versus Japan’s currency since 1995 as traders quit buying the greenback to prevent it from sliding below 90 yen after options contracts expired.

“We have seen significant selling off of sterling in the past couple of days after the U.K. banking system came into its problems,” said Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader. “Dollar-yen had been remarkably stable at 90 for some time.”

The pound traded at 124.75 per yen at 7:10 a.m. in Tokyo, after falling 0.1 percent yesterday and reaching an all-time low of 119.42. The British currency was at 93.28 pence per euro following a 0.7 percent decline. Sterling slid as much as 2.2 percent to $1.3622, the lowest level since September 1985, before trading at $1.3948.

The pound erased losses versus the dollar after Reuters reported the G-7 nations may discuss the currency’s plunge at its next meeting, according to unnamed person.

“It’s hard to imagine what kind of actual measure G-7 has up its sleeve, but clearly it’s enough to make sterling bears think twice about this sell-off,” said Mike Moran, a senior currency strategist at Standard Chartered Bank in New York.

Options Contracts

Traders abandoned the dollar when option contracts betting on its staying above 90 yen expired at 10 a.m. New York time yesterday, causing it to “collapse” versus the yen, according to Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey.

“This is just allowing the yen to do what it couldn’t do for the past 10 days or so,” said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.

The dollar decreased as much as 2.9 percent yesterday to 87.13 yen, the lowest level since July 1995. The euro fell as much as 3.2 percent to 112.12 yen, the lowest level since March 2002.

The Swiss franc dropped as much as 1.2 percent yesterday to 1.4964 against the euro and 1.3 percent to $1.1615 after Swiss National Bank Vice President Philipp Hildebrand said officials may intervene to curb the currency’s appreciation. Last year the franc advanced the most since the euro’s debut in 1999, appreciating almost 10 percent. It gained 6.1 percent against the dollar in 2008.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the franc and Sweden’s krona, decreased 0.5 percent yesterday after touching 86.504, the highest level since Dec. 8.

Confidence in the dollar is “critical” to the U.S. economy, Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said at his confirmation hearing yesterday. The Standard & Poor’s 500 Index gained 4.4 percent on speculation a plan from Obama will shore up banks.

Sterling lost 5.3 percent versus the dollar and 3.5 percent against the euro in the past three days after the U.K. government’s plan for a second bank bailout in three months raised concern the financial crisis is deepening. Shares of Barclays Plc fell for a seventh day in London on concern the bank may take more writedowns and be nationalized.

Bank of England

The central bank may acquire securities such as corporate bonds and commercial paper to bolster lending, Bank of England Governor Mervyn King said in a Nottingham, England, speech on Jan. 20.

“The speech hurt the currency as it was more explicit than we expected,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “The central bank is turning on the printing presses.”

The Bank of England will lower its benchmark rate by a half-percentage point to 1 percent at its Feb. 5 meeting, according to the median forecast of 28 economists surveyed by Bloomberg News.

The Monetary Policy Committee voted 8-1 to trim the main rate by a half-percentage point to 1.5 percent, minutes of the Jan. 8 decision published yesterday show. David Blanchflower voted for a full-point interest-rate cut.

“The U.K.’s imploding,” said Jonathan Gencher, Toronto- based director of currency sales at BMO Capital Markets, a unit of Canada’s fourth-largest bank. “The pound will remain under pressure until the BOE has cut rates until there is not much scope for further rate cuts.”