Bloomberg News

Pound Falls to Seven-Week Low Against Dollar on Merkel Comments

November 25, 2011

Nov. 24 (Bloomberg) -- The pound fell to a seven-week low against the dollar after German Chancellor Angela Merkel said joint euro bonds would send a “wrong signal,” spurring demand for the relative safety of the U.S. currency.

Sterling declined versus 12 of its 16 major counterparts, losing the most versus the South African rand and Australian dollar. Merkel said she remained opposed to joint euro bonds, damping optimism the policy would help resolve the sovereign- debt crisis. Ten-year gilts dropped.

“Sterling weakened on Merkel’s comments,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva. “The correlation between those comments and the capitulation in euro-dollar and cable was spot-on,” he said, referring to the pound-dollar exchange rate.

The pound dropped 0.2 percent to $1.5501 at 4:58 p.m. London time, after sliding to $1.5485, the weakest since Oct. 7. The U.K. currency fell 0.4 percent to 119.53 yen, and was little changed at 86.05 pence per euro.

“Nothing has changed in my position,” Merkel said at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France.

U.S. markets were shut today for the Thanksgiving holiday.

‘Risk Trades’

“Very few people want to be holding risk trades going into a long holiday weekend with the Americans out,” Rosenstreich said. “When we heard the Merkel comments, that was all they needed to get out of their positions. Given the risk we’re seeing in Europe right now, nobody wants to hold risk over the weekend. There’s no value in it whatsoever.”

The pound has declined 3.4 percent in the past year, the third-worst performer after the Canadian and New Zealand dollars among 10 developed-market peers measured by Bloomberg Correlation-Weighted Indexes.

Sterling weakened even after a government report confirmed U.K. economic growth accelerated in the third quarter.

Gross domestic product increased 0.5 percent in the third quarter, after rising 0.1 percent in the previous three months, the Office for National Statistics said. That was in line with the preliminary reading published on Nov. 1.

The Bank of England cut its growth and inflation forecasts last week and said yesterday the threat from the euro-area debt crisis had increased.

BOE Minutes

Minutes of the central bank’s Nov. 9-10 meeting released yesterday showed some policy makers said an increase in stimulus may be needed. The minutes revealed the nine-member Monetary Policy Committee voted unanimously to keep its key interest rate at a record low 0.5 percent and hold its target for quantitative easing at 275 billion pounds.

The 10-year gilt yield climbed two basis points, or 0.02 percentage point, to 2.16 percent. It fell to 2.104 percent yesterday, the lowest since Bloomberg began collecting data on the securities in 1992. The 3.75 percent bond due in September 2021 dropped 0.165, or 1.65 pounds per 1,000-pound face amount, to 113.955.

German 10-year bund yields increased five basis points to 2.19 percent.

“While the BOE is still in the game, gilts are probably going to outperform bunds because we still have a buyer,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “In bunds, you’re seeing more sellers than buyers at the moment.”

Money managers in Japan boosted their holdings of gilts by 1.53 trillion yen ($19.8 billion) in the first nine months of the year, set for the biggest annual purchase since 2008, Ministry of Finance data showed on Nov. 9. Japanese investors sold almost 1.46 trillion yen of bunds, the figures show.

Gilts have returned 16 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt gained 7.2 percent and U.S. Treasuries rose 9.8 percent, the indexes show.

--Editors: Nicholas Reynolds, Mark McCord

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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