Pound rises broadly on UK asset plan

LONDON (Reuters) - Sterling rose broadly on Thursday, boosted by stock market gains, a government plan to insure banks’ toxic assets and losses at Royal Bank of Scotland that were less than feared.

The British government announced a scheme under which it could end up insuring more than 500 billion pounds of bad assets in an attempt to get lending flowing again.

The news helped push shares higher, with the FTSE 100 index .FTSE up 2.2 percent, bolstering demand for currencies such as sterling which are perceived to be riskier.

The pound outperformed most other major currencies, however, on the view that most of the worst of the news on the UK’s banking sector may now be over.

Royal Bank of Scotland RBS.L reported a loss for 2008 of 24 billion pounds, the biggest in UK corporate history but still below forecasts. It also announced it would put 325 billion pounds of its assets into the UK's insurance scheme.

“There has been some natural support for sterling which the euro hasn’t seen,” Bank of Scotland Treasury Services currency strategist Naeem Wahid said.

“People seem to believe that most of the bad news on the UK banking sector is already out,” he said.

Wahid added that the RBS losses were “around 2 billion less” than people were expecting, while the Treasury scheme “draws a line under the banking sector losses.”

At 1600 GMT, the pound rose 1.2 percent against the dollar to $1.4365, while the euro fell 0.8 percent to 88.76 pence.

These gains helped push trade-weighted sterling up to 78.5 from an earlier low of 77.6.


Under the details of the insurance scheme, RBS will pay a 6.5 billion pound signing-up fee and be responsible for the first 19.5 billion pounds of any losses, while the taxpayer will be liable for 90 percent of any losses beyond that.

Analysts expressed relief at the relatively favourable pricing of the asset protection scheme, but they said the broader concerns about the troubled UK banking sector and the parlous state of UK government finances remain.

“If the market decides the insurance scheme has been drawn up on too generous terms, there may be renewed scope for hitting the pound,” CMC Markets analyst James Hughes said in a note.

RBS shares jumped after the results news, but the company’s chief executive Stephen Hester said while the government’s voting rights would be capped at 75 percent its economic stake could rise as high as 95 percent.

Elsewhere, there was some relief that testimony by Bank of England governor Mervyn King before a UK parliamentary committee produced nothing that could spook sterling markets.

“There was nothing new or substantial in the King testimony,” Bank of Scotland’s Wahid said.

King said the amount of money in the economy is growing too slowly and that the central bank would not allow “a great inflationary surge.”

“That is why we’ve asked the Chancellor for powers to engage in asset purchases in order to increase the amount of money in the economy and I would expect that to happen over the next few months,” he said.

The central bank has already slashed interest rates to just 1 percent and is broadly expected to cut them by another 50 basis points when it meets next week.

As rates approach zero, the BoE has indicated that it will embark on unconventional measures to purchase assets in order to boost the money supply.

Among other news on Thursday, a survey showed public expectations for UK CPI inflation over the coming 12 months rose to 1.5 percent in February from 1.1 percent in January, but this was still well below the Bank of England’s 2 percent target.

Editing by Stephen Nisbet