Bloomberg News

Pound Weakens as Europe Debt Woes Hurt U.K. Economic Prospects

September 13, 2011

Sept. 13 (Bloomberg) -- The pound weakened against most of its major counterparts as concern Europe’s debt crisis will derail the recovery in the U.K.’s largest trading partner hurt prospects for Britain’s currency.

Sterling declined to a seven-month low versus the dollar after an industry report showed a gauge of U.K. house-price expectations dropped in August, adding to signs the nation’s economy is losing momentum. The pound also depreciated as Bank of England policy maker Adam Posen said the central bank may need to expand its bond-purchase program, known as quantitative easing. Ten-year gilts fell as a government report showed inflation accelerated in August.

“The pound tends to move in sympathy with developments in the euro-zone because it’s such an important trading partner for the U.K.,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “If euro-land looks like it’s going to get hit then so does the pound. The weak domestic picture also means there’s likely to be further QE in the U.K.”

The pound fell 0.4 percent to $1.5798 at 4:47 p.m. in London, after sliding to $1.5762, the weakest level since Jan. 25. The currency dropped 0.8 percent to 121.54 yen, and lost 0.4 percent to 86.59 pence per euro.

Speculation Greece is nearing default pushed the euro toward a 10-year low against the yen as German Chancellor Angela Merkel warned about the risk of contagion for other euro-area nations. Italian borrowing costs surged as the government sold 3.9 billion euros ($5.3 billion) of five-year notes at an auction today.

House Prices

The pound dropped for a third day versus the yen as the Royal Institution of Chartered Surveyors said its index of real- estate price expectations fell to minus 23 last month from minus 13 in July. The number of real-estate agents and surveyors saying prices declined last month exceeded those seeing gains by 23 percentage points, the report showed.

The Bank of England may need to expand its bond-buying program by as much as 100 billion pounds to support the recovery, Posen said in a speech in Wotton-under-Edge, England.

Gilts reversed earlier gains after a government report showed consumer prices increased 4.5 percent in August from a year earlier, compared with 4.4 percent in July, the Office for National Statistics said in London. Inflation erodes the appeal of securities that pay a fixed return.

Ten-year yields rose three basis points to 2.41 percent, after dropping to 2.18 percent yesterday, the lowest level since at least January 1989 when Bloomberg started collecting data on the securities.

Gilts have returned 3.6 percent this month, compared with 2.9 percent for German government bonds and 1.2 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

--Editors: Nicholas Reynolds, Matthew Brown

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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