Forex - Pound stays on back foot amid focus on beleaguered UK banking system

LONDON (Thomson Financial) - The Bank of England's 50 billion pound lifeline for the UK banking system failed to bring the pound much help with at least as much attention falling on the Royal Bank of Scotland's expected rights issue.


Both factors bring to the fore the dire state of circumstances facing the financial system in the UK and as such led to falls for the pound. To some extent, today's plans announced by the Bank of England had been anticipated. Just to what degree it is hard to tell but going by the reaction on currency markets, there was little by way of surprise.


Peter Stoneham at IFR Markets said some sections of the market are worried about the effectiveness of the BoE initiative.


Additionally, the pound rose last week in anticipation of today's announcement and Monday may will mark "profit taking on the confirmation," Stoneham said.


"It remains to be seen if the 50 billion proves to be enough given that the mortgage market is far greater in size. The injection could clear up the infection but a strong inoculation is what is really needed," he added.


Analysts at UBS also said the pound tumbled on market disappointment with the plan.


"It is probably too early to judge whether the BoE plan will be a success. It is clear, however, that the UK central bank is trying to avoid the Fed's mistakes at its first TSLF auction," they added.


They added that high costs and barriers will likely make sure only those with genuine funding issues will have access to the facility and maintained their bearish stance on the pound.


Some believe the BoE will have to up its offer up to 100 billion pounds before there is any significant impact on the wider economy.


The reaction on the interbank market where banks lend to each other was also muted with the LIBOR rates at key maturities all staying hardly changed from last week and well above the current 5.00 percent benchmark BoE rate.


Separately, attention also fell on Royal Bank of Scotland Group PLC's plans for a rights issue. RBS, the UK's second-biggest bank, said in a brief statement that it was considering a rights issue, adding that it would make a further announcement "in due course."


Reports put the rights issue at up to 12 billion pounds, in order for the bank to replenish its capital reserves which have been depleted by write-downs related to the credit crunch and its acquisition of parts of Dutch rival ABN Amro last year.


Elsewhere, the euro was boosted by hawkish rhetoric from the European Central Bank, which continued to express caution over inflation.


ECB governing council member Erkki Liikanen said "inflation risks are real" in an interview with the Wall Street Journal.


"Our prime mandate is price stability. And history shows that if you fail there, it's a long negative impact on growth and it's very hard to get back," he said, suggesting the ECB will not cut interest rates for the time being.


For the dollar, corporate earnings data was crucial. To this end, Bank of America Corp's 77 percent drop in profits in the first quarter, weighed on the dollar.








London 13.35 BST London 0845 BST




U.S. dollar


yen 103.37 down from 103.72


Swiss franc 1.008 down from 1.0160




Euro


U.S. dollar 1.5915 up from 1.5833


yen 164.53 up from 164.23


Swiss franc 1.6062 up from 1.6087


pound 0.8009 up from 0.7944




Pound


U.S. dollar 1.9868 down from 1.9928


yen 205.39 down from 206.74


Swiss franc 2.0049 down from 2.0243




Australian dollar


U.S. dollar 0.9434 up from 0.9414


pound 0.4747 up from 0.4724


yen 97.54 down from 97.60






sivakumar.sithraputhran@thomsonreuters.com


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