USDX +GBP fundamentals

--Doom sayers zero in on pound

--Weak economy, scaled-back rate rise expectations dent sentiment

--Perceptions U.K. may waver on fiscal tightening another factor

      By Siva Sithraputhran     Of DOW JONES NEWSWIRES     

LONDON (Dow Jones)--If a stream of negative comment from investment banks this week is to be believed, the pound is heading for skid row as a confluence of factors weigh on the U.K. currency. Money flows are already pointing that way.

Data detailing the Bank of New York Mellon's custody activity shows a sporadic drip of pound sales since late April has developed into a torrent of outflows in the past week or so, as fundamental support for the currency has cracked.

The minutes of the Bank of England's June meeting, out Wednesday, capped a month of weak economic news and slashed economic projections.

The U.K. economy is in a forlorn state, the prospect of an interest rate rise is slim and the promise of fiscal discipline--which some weeks ago had some hailing the pound as a lesser safe-haven currency--is looking shaky as political tensions and industrial strife begins to mount.

While there is nothing concrete to go on yet, some are beginning to wonder if the country's coalition government will succumb to pressure to revise its tough spending cuts, said Neil M

ellor, a strategist at Bank of New York Mellon.

Unions in the U.K. are warning of a national day of action against austerity plans June 30 and more strikes are planned. In addition, the government's junior coalition partner, the centrist Liberal Democrats, is under intense pressure to show it can influence policy by softening some planned reforms after being trounced in local elections in May.

"There is a perception that the austerity plans are being chipped away a little bit," Mellor said.

At the heart of sterling's weakness is the moribund state of the U.K. economy, which is now widely seen keeping rates at record-low levels for the rest of 2011 and perhaps beyond, reducing the pound's relative attractiveness.

"The fiscal tightening in the U.K. comes at a price. Monetary policy has to be loose," said Ankita Dudani, a strategist at RBS, noting the sharp downward adjustment in rate-rise expectations seen thus far in 2011.

Earlier this year, the market had priced in a whole percentage-point increase in U.K. rates by the spring of 2012.

The Bank of England's minutes also suggested another possible round of quantitative easing is back on the agenda, contrasting with Federal Reserve Chairman Ben Bernanke's insistence later that day that such extraordinary measures will end in the U.S. this month, as scheduled.

The pound plumbed all-time lows against the Swiss franc Thursday, on last count at CHF1.3389, and fell below $1.60 against the dollar for the first time since April 1. But a more spectacular bashing may be on its way.

There is potential for the pound to sink to around CHF1.20-CHF1.25, analysts at Barclays Capital predict.

Morgan Stanley, meanwhile, sees the pound trading against the dollar at $1.49 from $1.62 previously.

"Among the G10 we believe that the pound is likely to be most at risk of a decline against the dollar over the next six months," the bank said Wednesday.

At 1255 GMT, sterling was trading at $1.597 against the dollar and CHF1.3408 against the franc.

-By Siva Sithraputhran, Dow Jones Newswires; +44 (0) 20 7842 9462; siva.sithraputhran@dowjones.com

(END) Dow Jones Newswires

June 23, 2011 09:08 ET (13:08 GMT)