Bloomberg News

Pound Drops Versus Dollar on BOE’s Rate Outlook, Euro Crisis

June 25, 2011

June 25 (Bloomberg) -- The pound posted a fourth weekly decline against the dollar amid speculation that the Bank of England will keep interest rates at a record low to counter faltering growth.

The British currency fell against the euro for the first time in three weeks as European Union leaders pledged to stabilize the euro-area economy and stave off a Greek debt default as long as the country sticks to budget cuts. Minutes from the U.K. central bank’s last meeting, released on June 22, showed officials voted 7-2 to hold interest rates at 0.5 percent, while some members foresaw the need for more bond purchases.

“The pound is likely to remain weak in the near term as economic data disappoints and because of speculation about another round of quantitative easing,” said Jane Foley, a senior currency strategist at Rabobank International in London.

The pound dropped 1.3 percent from last week to $1.5985 as of 4:58 p.m. in London yesterday. Sterling weakened 0.4 percent to 88.76 pence per euro and declined 0.9 percent to 128.41 yen.

The British currency fell 7.1 percent in the past 12 months, making it the third worst performer among 10 major- economy currencies after the U.S. and Canadian dollars, according to Bloomberg Correlation-Weighted Currency Indexes.

Gilts rose from last week, pushing 10-year yields down seven basis points to 3.13 percent. Two-year note yields dropped eight basis points in the week to 0.69 percent.

Debt Crisis

The pound declined after Bank of England Governor Mervyn King said yesterday the euro-area debt crisis poses the biggest risk to the stability of the U.K. financial system.

The comments echo those of the European Central Bank President Jean-Claude Trichet, who said on June 23 that the “most serious threat” to financial stability in the European Union stems from the mounting debt crisis.

Investors pushed back bets that the Bank of England will increase interest rates to beyond May 2012, according to forward contracts on the sterling overnight interbank average, Tullett Prebon Plc data show. As recently as April, traders were betting on an increase in May 2011.

A U.K. retail-sales index fell to its weakest level in a year this month as Britons curtailed spending on groceries and clothing, the Confederation of British Industry said on June 23.

The 10-year breakeven rate fell eight basis points from last week to 3.04 percentage points. The rate, a market gauge of inflation expectations, is derived from a yield gap between regular and index-linked bonds.

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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