A New Safe Haven In Sterling? By Nicholas Hastings

Investors appear to have found a new place to hide--the pound.

Like the yen and the Swiss franc before it, the U.K. currency is finding itself in favor despite concerns that the U.K economy may be slowing and that monetary tightening will have to be delayed.

For weeks, investors have been looking for a new safe haven as doubts over the global economy have grown and fears of a double dip recession in the U.S. have increased.

On Wednesday, the Federal Reserve only made matters worse by lowering its growth forecasts for this year and admitting that monetary policy may have to be eased again.

Slower growth data from China, rumbling concerns about European banks ahead of stress tests results later this month have only helped to intensify the search for stability.

Certainly, emerging markets as well as commodity currencies have all found themselves under investor scrutiny in recent weeks.

However, while this has been going on, one major and much more liquid currency has gradually found the spotlight burning brighter.

Step forward sterling.

See the pound's steady rise against the dollar in recent weeks:



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Ever since Conservative leader David Cameron confounded critics by stitching together an unlikely coalition with the Liberal Democrats after elections in May and then preserving his promise of reducing the budget deficit with a bold emergency budget filled with public spending cuts, investors have started to look at the U.K. in a different way.

Not only is the coalition proving much stronger than expected, with the opposition Labour Party too busy arguing over the publication of memoirs and preparing for a leadership election, but its fiscal probity is standing out prominently in a world where most governments have neither the electoral power nor the commitment to achieve what the U.K. is planning.

As Jonathan Loynes, chief European economist with Capital Economics in London, pointed out, investors have done this all before for the U.K.

"Decisive action by a new government to repair the public finances pushed the pound up sharply in the early 1980s and mid-1990s and could do so again over the coming months," he said.

Of course there are risks.

Chancellor George Osborne has yet to prove his mettle. He may have laid out his plans to slash waste and reduce the public sector.

However, he, Cameron and Liberal Democrat Deputy Prime Minister Nick Clegg have yet to face the full wrath of the unions as well as the party pressures they will face as they try to keep their coalition together.

Although stronger-than-expected employment figures this week may have brought a bright spot for the government and there is continued talk of higher interest rates given sticky inflation pressures, other economic numbers including those for the housing market remain worrying and the slowdown that is expected in the coming months as fiscal cuts bite could prove much deeper than anticipated.

Nonetheless, for investors looking for a safe haven in a much more uncertain world, this may not be of much concern.

For the past year, they have piled into the Japanese yen despite the fact that the Japanese economy remains at risk from deflation and the country is running one of the highest public debts of all major economies.

But, their love affair with the yen could be coming to an end as the fiscal disciplines needed to reduce the deficit may now be at risk.

Upper House elections last month destroyed the ruling DJP's majority and left the government much more susceptible to demands for spending increases. As the latest Bank of Japan projections show, growth this year may prove better than initially expected but growth next year will be disappointing again.

Contrast these uncertainties with the so far smooth fortunes of the U.K. coalition, as unusual as it may be, and it helps to explain why, despite all the worries about the U.K. economy, the pound has staged a nearly relentless rally since Cameron walked into 10 Downing Street two months ago.

Early Friday, the pound was relatively stable, trading slightly lower at $1.5409 at 0645 GMT compared with $1.5412 late Thursday in New York, according to EBS.

Currency market sentiment continued to be dominated by disappointment in the U.S. recovery and concern that the Fed could still ease monetary policy further. Also, weaker-than-expected results from Google late Tuesday helped to undermine some of the support earlier strong second-quarter earnings had given sentiment.

The resulting sharp rally in the yen, as investors turned to safe havens, helped to send Japanese stocks reeling with the Nikkei falling 2.9%.

The dollar is down at Y87.21 from Y87.46 while the euro has fallen to Y112.60 from Y112.81. The euro is also up a little at $1.2910 from $1.2900.