The pound dropped against the euro as concern that some of the U.S.’s biggest banks need new capital reduced demand for riskier assets. The pound lost as much as 1.5 percent against the Japanese yen, perceived as a haven against financial turmoil, after people familiar with the matter said U.S. regulators will say Bank of America Corp. needs $34 billion in new capital. The U.K. currency declined from near a four-month high against the dollar even as reports showed U.K. consumer confidence rose in April by the most in almost two years and services industries contracted less than forecast. “Rising risk aversion has taken some of the shine off the pound,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “The world is being reminded that the recovery could potentially be some way off.” The pound dropped 0.3 percent to 88.65 pence per euro as of 2:12 p.m, from 88.35 yesterday. It lost as much as 0.7 percent versus the U.S. currency, the most since April 28, to $1.4992, and was at $1.5075. It bought 149.03 yen, from 149.15 yesterday. The pound may rebound against the euro as the recession eases and will probably trade at 85 pence by the end of August, Jones said. Losses by the currency may be limited as today’s economic releases add to evidence the recession is waning. A U.K. index of service industries climbed to 48.7 in April from 45.5 in March, Markit and the Chartered Institute of Purchasing and Supply said in a report today in London. Nationwide Building Society said an index of consumer sentiment rose eight points from a month earlier to 50, higher than the 43 forecast of economists in another Bloomberg survey. ‘Armageddon Scenarios’ “All these Armageddon scenarios for the U.K. are proving to be unlikely,” said Ulrich Leuchtmann, head of currency strategy in Frankfurt at Commerzbank AG. The pound may advance to 84 pence per euro by year-end, he said. Bank of England policy makers decide on interest rates tomorrow amid signs three reductions this year, which have reduced borrowing costs to a record 0.5 percent, may be beginning to work. The central bank also started buying assets with newly created money to stimulate the economy. Gilts dropped, pushing the two-year note yield three basis points higher to 1.12 percent. The 4.25 percent security due in March 2011 decreased 0.07, or 70 pence per 1,000-pound face amount, to 105.68. The 10-year yield increased two basis points to 3.57 percent. Bond yields move inversely to prices. The Debt Management Office sold 3.5 billion pounds of securities maturing 2019 at an average yield of 3.58 percent. Demand for the notes exceeded supply 2.5 times, compared with 2.06 at the previous auction March 10, the debt office said.

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