Bloomberg News

Pound Declines Versus Euro; House Prices Fuel Economic Concern

June 27, 2011

June 27 (Bloomberg) -- The pound fell against the euro as a report showing house prices fell for a second month in June added to signs that the U.K. economic recovery is stalling.

Sterling earlier touched the lowest level against the dollar since January. The average cost of a home in the U.K. slipped 0.1 percent in June from May, London-based property researcher Hometrack Ltd. said in an e-mailed report.

U.K. data “is systematically disappointing at the moment,” said Neil Jones, head of European hedge-fund sales at Mizuho Financial Group Inc. “We’re still in sterling-selling mode. That sentiment is yet to run its course.”

The pound depreciated 0.4 percent against the euro to 89.27 pence as of 4:45 p.m. in London. It climbed 0.3 percent to $1.6004 after touching $1.5914, the weakest since Jan. 31, and added 0.7 percent to 129.21 yen.

Futures traders reversed their bets that the currency will gain against the U.S. dollar. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 11,360 on June 21, compared with net longs of 11,226 a week earlier, according to figures from the Washington- based Commodity Futures Trading Commission.

The British currency has fallen 7.3 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 Underperform

Gilts fell as stocks rose, pushing the 10-year yield up three basis points to 3.16 percent. The 3.75 percent security due in September 2020 fell 0.245, or 2.45 pounds per 1,000-pound face amount, to 104.66. Two-year note yields also rose three basis points, to 0.73 percent. The FTSE 100 Index advanced 0.4 percent, reducing demand for a safe haven.

British government securities underperformed their German counterparts this month, handing investors 0.8 percent compared with a 1 percent return from German debt, according to indexes compiled by the European Federation of Financial Analysts Societies.

Year-to-date, gilts beat their European peers, returning 3.3 percent while German bonds advanced 1.1 percent, on bets the U.K. central bank will keep its benchmark rate at a record low in coming months while the European Central Bank continues to raise borrowing costs.

While Britain’s inflation rate was 4.5 percent in May, more than twice the government’s target, the central bank kept its benchmark rate at a record low 0.5 percent this month and Bank of England Governor Mervyn King said on June 16 that weak growth in wages and money signal the current bout of above-target inflation will prove temporary.

Ten-year gilt yields will end the year at 3.85 percent, according to a weighted average of 12 economist forecasts compiled by Bloomberg.

--Editors: Keith Campbell, Mark McCord.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; 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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