Bloomberg News

Pound Slumps a Third Day as Traders Cut Central Bank Rate Bets

June 02, 2011

June 2 (Bloomberg) -- The pound weakened for a third day against the euro amid speculation that slowing U.K. economic growth will deter the nation’s central bank from raising interest rates.

Sterling reached its weakest level since May 6 versus the 17-nation currency as investors pared bets on higher borrowing costs after Bank of England Markets Director Paul Fisher told the Daily Mail he would consider adding to its asset purchases. A gauge of U.K. building activity based on a survey of purchasing managers showed civil engineering shrank for the first time in five months as the government cut spending.

“The comments by Fisher add to the negative sentiment toward the pound,” said Peter Frank, a currency strategist at Societe Generale SA in London. “It’s one of several negatives out there. Even marginal weakness within data sets is enough to trigger negative sentiment.”

The pound weakened 0.7 percent to 88.34 pence per euro as of 4:52 p.m. in London after reaching 88.54 pence. It dropped more than 1 percent versus the South African rand and 0.9 percent against the Norwegian krone. It was little changed at $1.6322.

The pound has slid 3 percent against the euro this year as Bank of England officials grapple with signs of deteriorating economic growth and inflation that accelerated to 4.5 percent in April, the fastest since 2008. The European Central Bank raised borrowing costs for the euro area in April even as the region struggles to contain the sovereign debt crisis that saw Portugal join Greece and Ireland in requesting a financial bailout from the European Union and International Monetary Fund.

Gilts Rise

Two-year note yields reached the least since November and short-sterling futures contracts rose today after Fisher said he would consider further central bank asset purchases if the economy “did take a sudden downturn,” according to the Mail. He remains “somewhat reluctant” since the threat of deflation subsided, the newspaper said.

“We are heading for a slowdown of the economy,” said Matteo Regesta, a senior interest-rate strategist at BNP Paribas SA in London. “It’s no wonder that people go for the safe-haven assets. Monetary Policy Committee members like Fisher have made clear they see more risk in terms of growth than second-round inflation effects.”

While a gauge of building activity based on a survey of purchasing managers increased to 54 from 53.3 in April, the index remained below its average for the first quarter, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said today.

Manufacturing Decline

Reports yesterday showed a manufacturing index fell to a 20-month low and U.K. mortgage approvals dropped to the least in four months. Services growth also slowed in May, according to the median of 26 economist estimates before tomorrow’s purchasing-managers index report.

The implied yield on the short-sterling futures contract expiring in June 2012 dropped five basis points to 1.28 percent, as investors cut bets on higher central bank interest rates.

The two-year note yield was one basis point lower at 0.88 percent, after falling to 0.85 percent, the lowest since November. The 10-year gilt yield was little changed at 3.25 percent. It pared an earlier advance after demand waned at an auction of 3.5 billion pounds of 2021 bonds.

Investors bid for 1.6 times the amount of gilts on offer at today’s sale, less than the 1.72 bid-to-cover ratio the last time the U.K. sold the securities on April 5. At 3.415 percent, the yield was lower than the previous sale’s 3.878 percent. The average yield in the past three sales of 10-year debt is 3.808 percent, while the average bid-to-cover ratio is 1.93.

Gilts have returned 2.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, which earned 0.2 percent. U.S. Treasuries have handed investors 3.2 percent in 2011.

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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