Bloomberg News

Pound Falls to 7-Week Low Against Euro on EU Plan; Gilts Drop

October 27, 2011

Oct. 27 (Bloomberg) -- The pound fell to a seven-week low against the euro after 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 three of its 16 major counterparts as Bank of England Markets Director Paul Fisher said the U.K. economy may be shrinking. Gilts declined after EU leaders meeting in Brussels yesterday said their plan points the way out of the sovereign debt crisis, reducing appetite for safer assets. U.K and European stocks gained.

“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 weakened 1.2 percent to 88.13 pence per euro at 4:53 p.m. London time after falling to 88.29 pence, the weakest level since Sept. 8. The U.K. currency strengthened 0.2 percent to 121.94 yen and gained 0.7 percent to $1.6083 after reaching $1.6084, the highest since Sept. 6.

The FTSE 100 Index of U.K. shares added 2.8 percent and the Stoxx Europe 600 Index gained 3.5 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 contain Greece and prevent speculation against the debt of Italy and France.

‘Silver Bullet’

Expanding monetary stimulus by 75 billion pounds on Oct. 6 was the minimum amount needed to shore up the economy, Fisher said yesterday in London during an interview with Bloomberg that was published 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.”

U.K. retail sales fell for a fifth month in October the Confederation of British Industry said. The gauge of annual growth was at minus 11 versus minus 15 in September, which was the lowest since May 2010, the London-based business lobby said in a report today.

“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.

Monthly Decline

The pound has weakened 1.2 percent in the past month against a basket of nine developed-market peers, extending its decline over the past year to 4.6 percent, according to Bloomberg Correlation-Weighted Currency Indexes.

Ten-year gilts snapped two days of gains, with the yield climbing 15 basis points, or 0.15 percentage point, to 2.62 percent. The two-year rate added one basis point to 0.59 percent after rising as much as seven basis points.

The Bank of England said it plans to buy 1.7 billion pounds of gilts maturing between 2015 and 2019 on Oct. 31. The central bank excluded the 4.25 percent 2032 gilt from an operation scheduled Nov. 2 because it will be auctioned by the debt management office within one week, it said in a statement today.

The central bank excluded the 8 percent 2021 gilt from asset-purchase facility operations until further notice, because it owns more than 70 percent of the so-called free float, the statement said.

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

--With assistance from Sarah Jones, Jennifer Ryan and Svenja O’Donnell in London. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporter 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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