Bloomberg News

Pound Weakens Against Dollar Amid Concern Over U.K. Recovery

June 18, 2011

June 18 (Bloomberg) -- The pound weakened against the dollar for a third week as investors bet the Bank of England will leave its key rate lower for longer amid concern that Britain’s economic recovery is stalling.

Sterling fell to the lowest level since May 24 versus the greenback after data showed retail sales slid and jobless- benefit claims surged. U.K. 10-year gilts advanced for a 10th week, the longest run since Bloomberg began collecting the data in 1989, as central bank Governor Mervyn King said officials should continue to hold rates at a record low.

“It’s primarily been its own interest-rate dynamic that’s done damage to sterling as the market priced out the rate hikes that it had previously” priced in, said Adam Cole, global head of currency strategy at Royal Bank of Canada in London. “It will take a turn in the data, in the U.K. especially but also internationally, for the market to start bringing forward rate- hike expectations again.”

The pound slipped 0.4 percent in the week to trade at $1.6166, as of 4 p.m. in London yesterday. It declined 0.1 percent to 88.49 pence per euro and 0.7 percent to 129.44 yen.

UBS AG pushed back its forecast for the central bank to start raising interest rates to February from August after King said in a speech in London on June 15 that a rate increase “would have meant a weaker recovery, or even further falls in output” and “a risk of inflation falling well below the target in the medium term.”

Gilts Advance

The Bank of England held rates at a record low 0.5 percent this month, even as data on June 14 showed consumer prices stayed at the fastest pace since October 2008 in May. The bank publishes the minutes of its June 9 meeting next week, a day after the government plans to sell 4.75 billion pounds of five- year debt.

The yield on the 10-year gilt fell three basis points from June 10 to 3.19 percent yesterday. The two-year note yield fell five basis points to 0.76 percent, after slipping to 0.73 percent a day earlier, the lowest level since Nov. 10.

Gilts have handed investors 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds have returned 0.7 percent, while U.S. Treasuries made 3.4 percent.

--Editors: Mark McCord, Keith Campbell

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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