© Reuters. FILE PHOTO: UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. Picture taken October 26, 2017. REUTERS/Dado Ruvic
By Samuel Indyk
LONDON (Reuters) -The British pound tumbled against a strengthening dollar on Wednesday as markets fretted about the state of the European banking system as fallout from the collapse of U.S. tech lender Silicon Valley Bank gathered pace.
Shares in Swiss lender Credit Suisse (SIX:) plummeted almost 25% after its largest investor said it could not provide more financial assistance to the bank.
The drop in Credit Suisse shares led the wider European banking index lower, triggering demand for the safe-haven dollar and away from high-beta currencies such as the pound.
The pound was last down 0.8% against a broadly stronger dollar at $1.2065, having hit a one-month high of $1.2203 on Tuesday.
{{2126|The do, which measures the currency against a basket of six others including the pound, was up 0.9% at 104.67.
Rabobank head of FX strategy Jane Foley said the banking worries were having an impact on currency markets, with markets betting on smaller interest rate hikes from central banks.
“The Credit Suisse news is coming on the back of already jittery markets,” Foley said.
“There’s been speculation that the Bank of England could be closer to a pause.”
Markets are now split on the Bank of England’s move at its March policy meeting, with investors seeing a 50% chance they pause their run of interest rate increases next week. Last week, the chance of a BoE rate pause stood at around 10%.
Focus was also on Westminster, where British finance minister Jeremy Hunt was set to detail plans try to speed up the world’s sixth-biggest economy after the shocks of Brexit, a heavy COVID-19 hit and double-digit inflation left it lagging behind its peers. However, he has already ruled out a major spending spree or large-scale tax cuts.
Therefore, analysts are not expecting a repeat of last September’s volatility when then finance minister Kwasi Kwarteng announced uncosted spending plans, sending the pound to a record low against the dollar of $1.0327.
“Other factors are taking precedent but in any case, this budget is likely to be engineered to be pretty dull,” Rabobank’s Foley said.
“Other events have stolen the headlines but this was never likely going to be a headline reaching budget anyway.”
Meanwhile, the euro was down 0.7% against the pound to 87.70 pence, its lowest level since Feb. 28.
