Bloomberg News

Pound Falls Most in Two Weeks Versus Euro as EU Agrees Debt Plan

October 27, 2011

Oct. 27 (Bloomberg) -- The pound fell the most in two weeks against the euro as European Union leaders agreed to expand a rescue fund for indebted nations, damping demand for the perceived safety of the British currency.

Sterling weakened versus all but two of its 16 major counterparts as Bank of England Markets Director Paul Fisher said the U.K. economy may be shrinking. The U.K. currency rose toward a seven-week high against the dollar. Gilts fell after EU leaders meeting in Brussels yesterday said their plan points the way out of the sovereign debt crisis, reducing appetite for safer assets.

“The comments overnight from the EU summit helped risk sentiment across the board,” said Jennifer Hau, a foreign- exchange strategist at Lloyds Bank Corporate Markets in London. “Risk sentiment is well-supported. The pound may underperform against other risky currencies.”

The pound depreciated 0.7 percent to 87.63 pence per euro at 11:24 a.m. London time, the biggest decline since Oct. 10. Sterling rose 0.1 percent to $1.5993 after strengthening to $1.6042 yesterday, the highest level since Sept. 8. It fell 0.4 percent to 121.24 yen today.

The FTSE 100 Index of U.K. shares added 2.4 percent, while the Stoxx Europe 600 Index gained 2.7 percent.

European leaders, meeting in Brussels for their second crisis summit in four days, expanded the size of their rescue fund to 1 trillion euros ($1.4 trillion) and agreed a debt- relief accord with bank representatives to ringfence Greece and prevent speculation against the debt of Italy and France.

‘Negative Growth’

U.K. retail sales fell in October for a fifth month as hardware and footwear purchases faltered, the Confederation of British Industry said.

The gauge of annual sales growth was at minus 11 compared with minus 15 in September, which was the lowest since May 2010, the London-based business lobby said in a report today.

The index was forecast to drop to minus 16 in October, according to the median of 10 economists surveyed by Bloomberg News before today’s report.

Expanding monetary stimulus by 75 billion pounds ($120 billion) on Oct. 6 was the minimum amount needed to shore up the economy, Fisher, 53, said in an interview in London yesterday, published by Bloomberg today.

“Even if we get a silver bullet solution to Europe, I still thought we needed to do something like that to head off the risk of a slowdown,” he said. “Looking at the fourth quarter for example, at best it seems to be flat, could easily have negative growth.”

Gilts Fall

The pound has weakened 1 percent in the past month against a basket of nine developed-market peers, and 4.4 percent over the year, according to Bloomberg Correlation-Weighted Currency Indexes.

“The pound may trade higher against the dollar, but quantitative easing in the U.K. may hold back sterling gains during times of risk-on,” Lloyds’ Hau said.

The 10-year gilt yield climbed seven basis points, or 0.07 percentage point, to 2.54 percent. The two-year rate was little changed at 0.58 percent after rising as much as seven basis points to 0.65 percent.

U.K. government debt has returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing the 7.2 percent increase for German bunds and 7.9 percent gain for U.S. Treasuries.

--With assistance from Jennifer Ryan and Svenja O’Donnell in London. Editors: Matthew Brown, Peter Branton

To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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


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