By Matthew Brown Sept. 21 (Bloomberg) -- The pound fell to the weakest against the euro in two months as a report showed the U.K.’s budget deficit widened more than forecast in August, raising the prospect of deeper government spending cuts. The British currency touched a six-day low versus the dollar and U.K. government bonds rose. The U.S. Federal Reserve may signal a move to looser monetary policy when it decides on interest rates later today. The Bank of England will release minutes of its last interest-rate meeting tomorrow. “Public finances are a risk to sterling, which is vulnerable to a further drop against the euro at these levels,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “If the Fed opens the door to further quantitative easing then that could signal other central banks are also willing to do something and the next would be the Bank of England.” The pound weakened 0.5 percent to 84.42 pence per euro as of 2:55 p.m. in London. Sterling was little changed at $1.5565 and 0.3 percent lower at 132.81 yen. Britain posted the largest budget deficit for any August since records began in 1993, the Office for National Statistics said today. Net borrowing was 15.3 billion pounds, compared with 13.5 billion pounds a year earlier. The median of 15 forecasts in a Bloomberg News survey was a shortfall of 12.5 billion pounds. Financial ‘Challenges’ The pound fell yesterday against all 16 of its peers after reports showed mortgage approvals by the nation’s six-largest banks dropped to the lowest level since April 2009, and U.K. home sellers lowered asking prices for a third month in September, wiping out half of the gains made since the start of 2010. The pound stayed lower even as Moody’s Investors Service said the U.K. can meet its financial “challenges” and maintain its Aaa credit rating. U.K. government bonds advanced, with the yield on the 10- year gilt 2 basis points lower at 3.13 percent. Two-year yields fell 1 basis point to 0.71 percent. Gilts have returned 4.4 percent this quarter, compared with 3.3 percent for German bunds and 2.7 percent for U.S. Treasuries, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net

Source