Bloomberg News

Pound Falls Most in 9 Months Versus Dollar on Rates; Gilts Gain

September 11, 2011

Sept. 10 (Bloomberg) -- The pound posted its biggest weekly decline in nine months against the dollar as investors added to bets the Bank of England will keep interest rates near record lows to support growth.

Gilts rose for a second week as U.K. reports added to evidence the economic recovery is losing momentum. Policy makers kept rates unchanged on Sept. 8 and maintained bond purchases at 200 billion pounds ($319 billion). The pound rose the most on record against the franc this week after Switzerland’s central bank set a cap on the Swiss currency to curb its strength.

“We have an underlying bearish view on the pound because of the economic backdrop,” said Beat Siegenthaler, currency strategist at UBS AG in Zurich. “The Bank of England is not exactly an inflation hawk.”

The pound declined 2.2 percent this week to $1.5866, the biggest drop since the period ended May 6. Sterling depreciated 1.6 percent against the yen. It rose 9.8 percent versus the franc, and 1.8 percent against the euro.

Options traders bet the pound will decline against the dollar, the yen and the franc in the next three month, according to data compiled by Bloomberg.

Gilts rose, pushing 10-year yields down 18 basis points this week to 2.26 percent, the biggest decline since the period ended Nov. 26. They fell to a record 2.237 percent on Aug. 18. Two-year yields dropped three basis points to 0.55 percent.

U.K. government bonds have handed investors a 9.5 percent return so far this year, compared with 7.4 percent from German debt and 8.3 percent from Treasuries, according to the European Federation of Financial Analysts Societies.

Growth Slows

U.K. economic growth slowed to 0.2 percent in the three months through August, from 0.6 percent in the three months through July, the National Institute of Economic and Social Research said Sept. 7. The inflation rate was at 4.4 percent in July, more than twice the central bank’s target.

Sales at British stores open at least 12 months, measured by value, fell 0.6 percent from a year earlier, the British Retail Consortium said Sept 6.

The pound has depreciated 6.1 percent in the past 12 months against a basket of nine major peers, the second-worst performer after the dollar, which fell 8.9 percent, according to Bloomberg Correlation-Weighted Currency Indexes.

--Editors: Nicholas Reynolds, Mark McCord

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Lukanyo Mnyanda in Edinburgh News at lmnyanda@bloomberg.net

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


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