Oct. 11 (Bloomberg) -- The pound fell against the dollar, snapping a two-day gain, as a government report showing U.K. manufacturing contracted in August more than analysts forecast added to signs the recovery is struggling.
Sterling declined from a one-week high versus the greenback after the British Chambers of Commerce said the expansion of the central bank’s monetary stimulus program announced last week may not be enough to prevent another recession. The monthly contraction in manufacturing was the third in succession and the biggest since April. Gilts rose.
“The U.K. macro data continues to be overwhelmingly disappointing and accounts for why sterling is underperforming against the dollar,” Neil Jones, London-based head of European hedge-fund sales at Mizuho Corporate Bank Ltd., wrote in an e- mailed comment. “It’s one of the reasons for the expansion of QE. Gilt yields can go lower still.”
The pound depreciated 0.4 percent to $1.5600 at 4:15 p.m. London time, after rising to $1.5689 yesterday, the highest level since Sept. 29. It was 0.4 percent weaker at 87.42 pence per euro, its lowest level since Sept. 26.
Britain’s currency may decline to below $1.50 and lower than 85 pence per euro by year-end, Jones said. Yields on 10- year gilts may drop to 2 percent from 2.58 percent today, he said.
Factory output fell 0.3 percent from July, when it slid a revised 0.2 percent, the Office for National Statistics said in London. The median forecast of economists surveyed by Bloomberg was for a decline to 0.2 percent. Overall industrial production, which includes mining and oil and gas, rose 0.2 percent.
The pound depreciated against most of its major counterparts last week as the Bank of England’s reactivation of its quantitative-easing program fueled concern that quickening inflation will erode the value of the currency.
The central bank raised the ceiling for bond purchases to 275 billion pounds from 200 billion pounds, the biggest expansion since the first round of stimulus in March 2009, saying slowing global growth and the turmoil in Europe threaten the U.K. recovery.
“The recent increase” in quantitative easing “is welcomed, but more radical measures are needed,” British Chambers of Commerce Chief Economist David Kern said in an e- mailed statement in London.
Bank of England policy maker David Miles said in London yesterday that while the economic outlook has worsened, there were “good reasons” to think that the extra stimulus will aid the recovery.
The U.K economy grew less than economists forecast in the second quarter, expanding 0.1 percent from the previous three months, the Office for National Statistics said last week. That was lower than the 0.2 percent previously published and missed the 0.2 percent expansion forecast in a Bloomberg survey.
The pound has declined 1.5 percent in the past six months and 3.1 percent in the past year, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies.
--With assistance from Svenja O’Donnell in London. Editors: Mark McCord, Peter Branton
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