Pound weakens as investors seek safe-haven of the US dollar

The pound weakened slightly against the dollar yesterday following fears that an outbreak of swine flu in Mexico could turn into a global pandemic. As a result, investors took pre-emptive action by dumping travel and leisure stocks, with British Airways share price finishing the day down 7.4%, whilst travel group Thomas Cook lost 4.3%. Top economists fear that in the worst case scenario, a swine flu pandemic could cost the world economy $3 trillion in lost output, equivalent to 4.8% of world GDP, significantly hampering a global economic recovery. As a result, investors dumped sterling in favour of the perceived safety of the greenback in order to reduce their exposure.

In early trading, sterling lost ground against the dollar as concerns surrounding the UK’s ballooning debt and struggling economy continued. As revealed on Friday, the British economy shrank by 1.9% in the first three months of 2009, the biggest fall since the third quarter of 1979 and much worse than the 1.5% contraction analysts predicted. The figure cast fresh doubt over Chancellor Alistair Darling’s growth forecasts announced in his budget last Wednesday, predicting an optimistic 1.25% growth next year and 3.5% in 2011. In addition, Mr. Darling’s announcement that the UK will run a budget deficit of 12.4% of GDP for the coming fiscal year, as well as issue a record £220 billion of gilts, has continued to weigh on investors’ mind and, as a result, they have looked to the perceived safe-haven of the dollar to reduce risk. Later in the day, news that there were suspected cases of swine flu in the UK, Canada and elsewhere further exacerbated this flight to safety. Moreover, property data company Hometrack’s monthly report for April did little to cheer investors, as it confirmed house prices in England and Wales fell by 10.1% compared with a year ago, a modest improvement on the 10.3% fall in March. Although the markets largely shrugged off this data, it no doubt contributed to the weakening of the pound against the dollar as again investors looked to the perceived safety of the greenback to reduce risk.

Investor risk aversion also increased following comments by Lawrence Summers, director of the White House National Economic Council, who said the US economy will experience “sharp declines in employment for quite some time this year,” on Sunday night’s Fox News Sunday. His assessment came just two days before a crucial report in the US is due, which analysts expect to show a 4.7% contraction in the world’s largest economy in the first quarter of 2009. There was also further disappointing news in the UK property market later in the day, as a Mortgage Approvals report released by the British Bankers’ Association (BBA) showed the first drop in mortgage lending by the country’s major banks for four months in March. The number of mortgages approved for house purchases last month fell 6.8% from February to 26,097, although the BBA did say they expected fluctuations during a recession. Nevertheless, more negative news from the housing market did little to improve investor confidence that it may be on the cusp of a recovery, and together with concerns over the severity of the swine flu outbreak and the other data released throughout the day, the news caused sterling to weaken against the dollar, finishing the day at $1.4646.

There is an important Consumer Confidence survey due in the US today at 15.00 BST, however all eyes are likely to be on the swine flu story today to see if there are any more confirmed cases.