BS: U.K. Pound Weakens as European Optimism Curbs Demand for Safety
Jan. 10 (Bloomberg) -- The pound weakened against the euro for a second day as optimism political leaders are taking steps to halt the spread of Europe’s debt crisis curbed demand for sterling as a refuge.
Britain’s currency declined to a five-month low against the Australian dollar as speculation China may act to spur growth boosted demand for higher-yielding assets. More Bank of England stimulus may not be enough to revive U.K. economic growth, the British Chambers of Commerce said. The debt office sold 700 million pounds ($1.08 billion) of November 2047 inflation-linked bonds at a negative yield.
“Sterling has clearly been benefitting in times of risk aversion,” said Paul Robson, a London-based senior foreign- exchange strategist at Royal Bank of Scotland Group Plc. “If people are a little bit more confident about Europe, that probably translates into a weaker” pound, he said.
The U.K. currency slipped 0.3 percent to 82.82 pence per euro at 1:08 p.m. London time, and was little changed against the dollar at $1.5465.
The pound depreciated 1 percent to A$1.4951 after reaching A$1.4948, the lowest level since Aug. 2.
Sterling has advanced 2.2 percent in the past six months, the third best performer, after the dollar and the yen, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The pound outperformed the euro as concern the debt crisis was deepening stoked demand for U.K. assets as an alternative to securities denominated in the 17- nation currency.
Rating Review
Fitch Ratings will conduct a review of the U.K. credit grade in the first half of the year as part of its normal oversight process, David Riley, head of the sovereign-debt unit at the company, told reporters at a conference in London today.
“There’s not much room for maneuver in the U.K. public finances,” he said. Fitch has “no plans at this point in time to change the rating,” and France’s rating is at “greater risk” of a downgrade, he said.
The British Chambers of Commerce said it forecasts policy makers will increase their target for bond purchases by 50 billion pounds to 325 billion pounds in the first quarter.
“This will not achieve its full potential in supporting growth unless supplemented by the early introduction of a sizable and effective credit-easing program,” Chief Economist David Kern said.
QE Forecast
All but one of 41 economists surveyed by Bloomberg News predict the Bank of England will leave its bond-purchase target unchanged at its meeting on Jan. 12. Martin Gueth, an economist at Landesbank Baden-Wuerttemberg in Stuttgart, Germany, forecasts an increase to 325 billion pounds.
The Monetary Policy Committee will leave the benchmark rate at a record-low 0.5 percent, according to all 53 economists in a separate survey.
Two-year government debt fell for the first time in three days, pushing yields two basis points higher to 0.41 percent. The rate fell to a record-low 0.271 percent on Dec. 30. The 10- year gilt yield climbed four basis points to 2.04 percent.
The Debt Management Office sold index-linked gilts maturing in November 2047 at a real yield, or the yield after accounting for inflation, of minus 0.116 percent.
“We’re probably going to have to get used to auctions with negative real yields,” said Jamie Searle, an interest-rate strategist at Citigroup Inc. in London. “Linkers look pretty good value here relative to nominals” because asset purchases by the Bank of England are driving down rates on conventional gilts relative to inflation-linked debt, he said.
Gilt Performance
Gilts slipped 0.2 percent this year after returning 17 percent, including reinvested interest, in 2011, according to Bank of America Merrill Lynch indexes. U.K. inflation-linked bonds earned more than 21 percent last year, returning 0.2 percent in 2012, the indexes show.
U.K. bonds were the best performers last year among 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.
The Debt Management Office will sell 0.375 percent index- linked gilts due 2062 through banks in the second half of February, it said on Jan. 6. It will also sell 3.75 percent gilts maturing in 2052 during the week starting Jan. 23.
The yield on 30-year U.K. gilts dropped below the rate on similar-maturity U.S. Treasuries for the first time since Aug. 1, based on closing-market rates. The U.K. yield was at 3.055 percent, compared with 3.064 percent on the U.S. securities.
--With assistance from Jennifer Ryan, Scott Hamilton and David Goodman in London. Editors: Daniel Tilles, Nicholas Reynolds
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
