UK pound falls after poll

June 8, 2001
Web posted at: 0805 GMT

LONDON (CNN) -- The UK pound weakened to a 15-year low for a third time this week and fell against the euro after the Labour Party's landslide election win.

Currency markets focused on the prospects of the UK joining the euro sooner because of Labour's big majority. The London stock market was mixed, with banks, utilities and oil companies falling on regulatory concerns.

One likely post-election move is an early cut in interest rates by the Bank of England to reverse the country's falling manufacturing output, analysts said.

What the election result does is focus the minds of investors on the timing of the UK's entry into the euro.

The pound opened down a third of cent against the dollar at $1.3825, before falling to a 15-year low for a third time this week to $1.3775. It bounced back to $1.3810.

"This was not the 200 plus seat majority that the markets feared, so it will provide some relative relief for sterling," economists at Bear Stearns wrote in a note to investors. "The government will be a little chastened by the smaller victory margin and will discourage the bears from taking sterling any further to the cleaners. We should see a bounce from $1.38."

The FTSE 100 index of leading UK shares opened up 12.2 points, or 0.2 percent, at 5,963.9, before falling back.

The UK currency also weakened against the euro, with the European single currency buying 61.38 pence compared with 60.82 pence when markets opened.

For Britain to enter the euro, the pound would have to lose about 15 percent of its current value and weaken to 70 pence to the euro, the equivalent of the 2.94 German marks level the pound held before it was ejected from the European Exchange Rate Mechanism in October 1992.

The first task facing the new government of Tony Blair will be to tackle falling output of UK manufacturing, analysts said.

UK National Statistics said on Thursday output slumped 0.9 percent in April, the worst performance since August 1997.

In the last three months, output fell 1.1 percent from the previous three months, the worst drop since September 1991.

The figures, which were much worse than economists had expected, look likely to hit economic growth forecasts this year and could lead to an early  cut in the UK's 5.25 percent interest rate.

The Bank of England on Wednesday left rates unchanged at 5.25 percent, having reduced them from 6.0 percent at the start of the year.

But manufacturers have appealed for further rate cuts to help the sector avoid recession.

On the London stock market, new economy and telecom stocks rose and old economy shares such as banks and utilities dropped on regulatory concerns.

With its big majority, Labour can be more aggressive in the face of what the public sees as excessive profits being made by oil companies, utilities and banks.

But analysts still expect the benchmark FTSE 100 to test the 6,000 mark.

Shares in logistics and construction companies are expected to rise in the medium term as the government pumps money into infrastructure projects, analysts said.

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Bank of England
Bank of England holds rate at 5.25 percent – June 6, 2001

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