Bloomberg News

Pound Reaches 1-Week Low Versus Dollar After PPI; Gilts Rally

July 08, 2011

July 8 (Bloomberg) -- The pound fell to the lowest in more than a week against the dollar and gilts rallied as a measure of inflation slowed to the least since September, weakening the case for higher interest rates.

Yields on 10-year gilts fell to within one basis point of the lowest this month, while sterling weakened versus half of its 16 major peers. The rate of price growth for goods leaving U.K. factories increased 0.1 percent in June from May, when it rose 0.2 percent, the Office for National Statistics said today. The Bank of England left its key rate at a record-low 0.5 percent yesterday and maintained its bond-purchase program to help support the U.K. recovery.

Today’s data “is still seen as adding to the Bank of England’s policy dilemma, and thus remains less supportive for sterling,” said Valentin Marinov, a currency strategist at Citigroup Inc. in London. “The monetary policy committee will keep rates lower for longer.”

The pound fell as much as 0.3 percent to $1.5932, the weakest intraday level since June 28, before trading at $1.5953 as of 12:41 p.m. in London. Sterling gained 0.7 percent to 89.32 pence per euro and was little changed at 129.86 yen.

Ten-year gilts rose for a fourth day in five, lowering yields by four basis points to 3.26 percent. The 3.75 percent security due September 2020 rose 0.29, or 2.9 pounds per 1,000- pound ($1,595) face amount, to 103.85. Yields on two-year notes were little changed at 0.80 percent.

Rate Outlook

Britain’s currency has lost 3 percent this year against a basket of nine developed-market currencies tracked by Bloomberg Correlation-Weighted Currency Indexes, as worsening economic growth limits the Bank of England’s ability to raise rates.

U.K. economic growth slowed to a virtual standstill in the second quarter, falling to 0.1 percent in the three months to the end of June, the National Institute of Economic and Social Research said in an e-mailed statement yesterday.

Investors are now betting that the Bank of England won’t raise borrowing costs until after May next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average, or Sonia, show. As recently as February, the data indicated traders were betting on a rate increase this May.

The implied yield on short-sterling futures expiring in March 2012 was one basis point higher at 1.03 percent. The yield has still fallen from a high of 2.08 percent in February as investors bet interest rates will stay low for longer.

Short-sterling futures are used by analysts to gauge the future trajectory of borrowing costs between banks.

--Editors: Matthew Brown, Keith Campbell

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

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


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