uk pound

Pound slumps on hung parliament fears


FRANKFURT (MarketWatch) -- The British pound fell sharply against the U.S. dollar and the euro on Monday, as worries about the outcome of the U.K. general election and the high fiscal deficit put the currency under heavy selling pressure.

Sterling intensified its losses after Prudential /quotes/comstock/13*!puk/quotes/nls/puk (PUK 15.79, -2.71, -14.65%) /quotes/comstock/23s!a:pru (UK:PRU 527.50, -74.50, -12.37%) said it will buy AIA, the Asian operation of American International Group, for $35.5 billion of cash and stock.

The British pound dropped 2.4% to $1.4870, falling below $1.50 for the first time since May 2009. It earlier hit an intraday low of $1.4772.

The euro rose 1.6% against the British pound.

Hans Redeker, global head of foreign exchange strategy at BNP Paribas, said that following the latest opinion polls, the market is concerned that the party of Prime Minister Gordon Brown may win the upcoming U.K. general elections.

A YouGov poll for the London Sunday Times placed the opposition Conservative Party only two points ahead of Brown's Labor party, according to the Wall Street Journal.

The concern is that "the current government would stay in power," Redeker said. "Now the market is very worried about the fiscal stance. The focus is turning around from Greece to the U.K." Similarly to Greece, the U.K. faces a high budget deficit.

Analysts at Action Economics said the narrow lead for the Conservative party raises the risk of a hung parliament, which may hinder deficit-cutting measures.

"Sterling looks weak across the board," Redeker said, adding that this may be a starting point for a small sterling crisis.

Economic data released on Monday also weighed on sterling. The U.K. CIPS/Markit purchasing managers' index for February was 56.6, unchanged from January, which was a fifteen-year high.

Meanwhile, the Prudential news was also a big factor for pound weakness, analysts said.

Action Economics analysts said the pound "made another leg lower" on the Prudential news. If the deal goes through, the buyer would need to sell sterling to buy U.S. dollars