Bloomberg News

Pound Weakens Versus Dollar on Summit Pessimism; Gilts Advance

October 26, 2011

Oct. 26 (Bloomberg) -- The pound fell against the dollar, snapping five days of gains, and gilts rose amid mounting concern Europe’s leaders will be unable to find a solution to the euro-region debt crisis at a summit today in Brussels.

Sterling pared declines versus the euro after an EU official said talks between European Union leaders and banks on bondholder losses as part of a second Greek rescue package have been suspended. Confederation of British Industry data showed an index of factory orders fell and business optimism plunged to the lowest level in 2 1/2 years this month.

“The market is very uncertain and sterling-dollar reflects the slide in the euro as the market starts to lose some confidence” in euro-area policy makers fixing the debt crisis, said Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc in London. “As far as gilts are concerned, it’s exactly the same reasons. We shouldn’t underestimate to impact of the data as well. The CBI numbers were pretty shocking.”

The pound was 0.6 percent weaker at $1.5909 at 4:52 p.m. London time after strengthening to $1.6042, the highest level since Sept. 8. Sterling was little changed at 87.03 pence per euro after weakening to 87.22 pence. The euro slid 0.5 percent to $1.3844.

The pound has depreciated 0.2 percent in the past month, extending a 12-month decline to 3.5 percent, according to Bloomberg Correlation-Weighted Indexes.

EU Leaders Meet

European leaders are gathering to debate the shape of Greece’s second bailout, the recapitalization of banks and the retooling of the 440 billion-euro rescue fund into a more potent weapon against the region’s debt turmoil.

The EU is seeking voluntary participation by banks, though a forced solution can’t be ruled out, the official said in Brussels today on condition of anonymity because the talks are private. While policy makers and bankers are converging on a 50 percent writedown for Greece’s lenders, the disagreement centered on the specifics of the transaction. The dispute focused on how much of the risk of newly issued Greek bonds should be insured, the official said.

“If tonight’s EU summit provides the conclusive and specific solution to the debt crisis that everyone is hoping for, I would expect euro-dollar to rally sharply and the pound would follow that upwards,” said Elizabeth Gregory, a Geneva- based market strategist at Swissquote Bank SA. “If we don’t get any solution, there’s going to be a devastating effect. The euro’s going to collapse through $1.35 levels and I think the pound is going to get dragged down too.”

Gilts Gain

A factory orders gauge declined to minus 18 in October, its weakest reading in a year, from minus 9 the previous month, the CBI said in a report in London today. A quarterly measure of sentiment fell to minus 30, the lowest since April 2009, from minus 16 in July.

Gilts gained, pushing the 10-year yield four basis points lower to 2.47 percent. The 3.75 percent security due September 2021 rose 0.350, or 3.50 pounds per 1,000-pound face amount, to 111.115. The two-year note rate was little changed at 0.58 percent.

The Bank of England bought 1.7 billion pounds of securities maturing in between 10-25 years as a part of its asset-purchase operation.

--With assistance from Keith Jenkins in London. Editors: Mark McCord, Nicholas Reynolds

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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


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