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Pound falls hard on fears of hung parliament

Text by News Wires

Latest update : 2010-03-01

Sterling slumped to a nine-month low against the US dollar on Monday amid fears an indecisive election result in the spring could hamper efforts to reduce Britain's gaping budget deficit.

AFP - The British pound hit a nine-month low point against the dollar Monday on fears that an upcoming general election could lead to a hung parliament with no single party commanding a majority, analysts said.

Dealers sold sterling after an opinion poll at the weekend suggested that the main opposition Conservatives' long-standing double-digit lead over the ruling Labour Party had all but vanished to just two percentage points.

The pound fell sharply in reaction, reaching as low as 1.478 dollars and below 1.10 euros.

"Many investors have been slow to appreciate the possibility of a hung parliament and the consequent fiscal risks," said analysts Citi European Economics in a briefing note.

"Even after the recent market turbulence, we doubt that political risks are fully factored into gilts (bonds) and sterling," they added.

The Conservatives have enjoyed a double-digit poll lead over Prime Minister Gordon Brown's governing Labour Party for more than two years -- but the gap has narrowed in recent weeks.

A YouGov opinion poll published in the Sunday Times cut the lead to just two points -- 37 percent for the Tories, against 35 percent for Labour -- in what the paper said would lead to a minority Labour government.

That could result from a hung parliament -- an election result where neither of the main parties can form a majority in the House of Commons, the lower house of parliament.

Lee Hardman of The Bank of Tokyo-Mitsubishi UFJ said: "With the balance of risks now shifting in favour of the formation of a minority Labour government... we have become even more bearish over the near-term prospects for the pound.

"A Labour victory would further damage the fiscal credibility of the UK given their reputation for loose fiscal policy, at a crucial juncture given the need for a credible plan to bring down the budget deficit," he added.
 

Date created : 2010-03-01

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