Pound takes another battering as polls narrow

[February 27, 2010]  LONDON (AP) -- The British pound took another battering Friday as investors fretted about the strength of the recovery from recession and about a general election that opinion polls suggest will be closer than previously thought.

By mid-afternoon London time, the pound was down 0.6 percent on the day at a nine-month low of $1.5168, having earlier briefly topped $1.53 in the wake of revised figures showing the economy grew by 0.3 percent in the fourth quarter, better than the 0.1 percent initially thought.

Investors worried that most of the upward revision was due to government spending, which will more than likely start being removed after the general election because of Britain's burgeoning budget deficit.

Prime Minister Gordon Brown has to call a general election by early June. The recent shrinking of the lead held by opposition Conservatives in the polls and the better than expected growth figures have stoked talk that Brown may move even sooner.

"With consumer confidence rising and the Conservative poll lead narrowing, Brown must be tempted to hold a snap election next month," said Ian Kernohan, economist at Royal London Asset Management.

One of the key themes in the election campaign, whenever it formally begins, will center around dealing with the country's budget deficit, which is expected be around 12 percent of economic output this year - in a league with Greece, which is in the throes of a debt crisis.

Jane Foley, research director at Forex.com, said the growth figures put into sharp focus the central dilemma facing economic policymakers after the election.

"These data highlight the ongoing argument over the risk of a double dip recession if too much austerity is introduced after the general election and the opposing view that a potential funding crisis could result if no austerity is announced," said Jane Foley, research director at Forex.com.

There is mounting speculation that the general election will not give any one party a majority in Parliament - a poll in the Daily Telegraph newspaper earlier echoed recent findings that the Conservative lead is now in single digits.

Britain is not used to coalition governments - the last true coalition was during the Second World War though there was a parliamentary pact between Labour and the Liberal Party in the late 1970s.

The worry in the markets is that economic policy in a post-election coalition would not be as clear-cut than if a single party emerged triumphant. The worry is amplified if a coalition cannot be concluded and a second election looms.

"The U.K.'s fiscal worries are well known and will not be helped by the upcoming general election where a 'hung parliament' is thought to be the worst outcome," said Neil Mackinnon, global macro strategist at VTB Capital.

[Associated Press; By PAN PYLAS]

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