British Prime Minister Gordon Brown backed down from replacing his finance minister on Friday in a bid to hold his government together and end a political crisis that has knocked sterling.
The pound hit a two-week low against the euro after the resignation of another senior minister – the third in as many days – and local election results that pointed to expected big losses for Labour but no clear swing to the main opposition Conservatives [nL5597785].
"The market is waking up to what a mess politics are in the UK," RBC currency strategist Adam Cole said.
There was some relief for the market, however, from news that finance Minister Alistair Darling is to remain in his job [ID:nLAL002238]. This will offer continuity in what is the most important political portfolio for markets.
Media reports said Brown had given up on a plan to replace Darling with his close ally Ed Balls after Darling refused to move. Darling has won praise for his efforts to pull Britain out of its deepest recession since World War Two.
A gathering rebellion against Brown has increased the possibility of an autumn election, eight months ahead of time. Three ministers have resigned in quick succession and some Labour deputies have been gathering signatures to unseat Brown.
Work and Pensions Secretary James Purnell, seen by some as a potential future leader of the party, became the latest cabinet minister to quit on Thursday. In a letter published in The Times newspaper he called on Brown to go.
"I now believe your continued leadership makes a Conservative victory more, not less likely," Purnell said in a letter to Brown. "I am therefore calling on you to stand aside to give our party a fighting chance of winning."
Friday's cabinet reshuffle is seen as a last chance for Brown. His departure after only two years would add to pressure on Labour to bring forward a general election.
The opposition centre-right Conservatives are well ahead in the polls and would be the clear favourites to return to power for the first time since 1997.
"The government is collapsing in front of our eyes," Conservative leader David Cameron said on his website.
Sterling fell to a 10-day low against a basket of currencies, of 81.0 <=GBP>. The euro rose to a two-week high of 88.67 pence <EURGBP=>, a gain of almost 1 percent on the day.
Against the dollar, sterling fell to a one-week low of $1.6017 <GBP=D4>, also a fall of close to 1 percent.
POLLS BLOW
Early results in local elections pointed to widely expected heavy losses for Brown's Labour. Unsettling for markets, the lost Labour vote appeared to have been split among opposition parties with no clear beneficiary.
"The market would like to see a more positive clear-cut swing towards the Conservatives and the vote indications so far only increase the political uncertainty," RBC's Cole said.
A weak showing for Labour in Thursday's European elections when results are released on Sunday could be the final blow for Brown, Simon Lee, a politics expert at Hull University, said.
"Even if between now and Sunday, no other cabinet minister follows Purnell's example, if results are as bad as seems likely it will be very hard for Gordon Brown to survive," he said.
News reports said up to 75 Labour members of parliament — around a fifth of the total — were ready to sign a letter calling on Brown to go, even before Purnell's announcement.
Health Secretary Alan Johnson is seen as the front-runner to replace Brown. The BBC reported that he had a "structure in place" for a leadership campaign.
