Labor Landslide Puts Forex Skids Under Sterling, Stocks Calm
Sterling slumped to 16-year low points on Friday as the British Labour Party cruised to a general election victory that many dealers feel could herald an early campaign to push the pound into the euro.
But the London stock market reacted quietly to Prime Minister Tony Blair's second successive landslide victory, shrugging off fears that another huge Labour majority could prompt a more radical agenda that punishes business.
The pound fell as low as 1.3775 dollars here, reacting not just to Blair's victory, but to the resignation of Conservative leader William Hague, who had campaigned on an anti-euro ticket. By late afternoon it stood at 1.3797 dollars and 1.6267 euros.
The euro itself was weak because Ireland was poised to deliver a no vote in a referendum on EU expansion into eastern Europe.
Sterling has fallen relentlessly this week because the market has suddenly woken up to the prospect of a buoyant Blair harnessing the momentum from his election win to mount a pro-euro campaign.
Blair has promised to hold a referendum on euro-entry within two years, provided key economic tests of convergence are passed.
On Friday, the British prime minister said only that Britain "needed to make changes too so that we are engaged and exerting influence" in Europe and the wider world.
The pound is falling because investors feel that the currency would have to depreciate by 10 percent or more to ensure that joining the euro-zone would not hurt exporters.
Entry into the euro-zone would not necessarily imply sea-changes in broad economic policy, which is already subject to single market rules.
But it would require harmonisation of base interest rates. The base euro-zone rate, set by the European Central Bank, is 4.50 percent. The rate set by the Bank of England is 5.25 percent.
"We are seeing a real change in sentiment towards the pound," said Canadian Imperial Bank of Commerce analyst Audrey Childe-Freeman. "It has become clear for investors that the pound will join the euro-zone and that at its current level it is not competitive enough."
Others see the market moves as speculative.
"If the UK were to join EMU, a lower rate would clearly be desirable," said Commerzbank analyst Kamal Sharma. "The Conservatives'... electoral failure leaves the new government in a strong position to push forward its own agenda. But does this really mean early EMU entry? We doubt it very much."
Pro- and anti-euro forces were quick to catch on to the theme that will likely dominate the early months of the new parliament.
Anti-euro factions were already rallying support on Friday -- even before the last votes in the general election were counted. A two-page ad in the Daily Mail showed the E and O of euro locked together in handcuffs. "The real battle starts now," it declared. "If you don't want Britain to be locked into the euro, support the 'no' campaign."
The pro-euro Britain in Europe group said it fully expected Blair's triumph to give him the mandate to "lead a great national debate on Europe and the single currency".
But while currency markets were alive with activity, the stock market responded in limp fashion to the Labour win, the FTSE 100 index barely budging at all to close at 5,950.6 points, up just 2.3 points.
"The stock market had already discounted a landslide victory for the Labour Party," said an analyst at NatWest Stockbrokers. "It's no real big shakes." – LONDON (AFP)
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