The pound dropped for a third week against the dollar after industrial production and house-price data added to evidence the U.K. economy is struggling to emerge from a recession. Sterling also declined against the yen. It gained against the euro. Reports this week showed manufacturing shrank more than economists forecast in August and house prices fell for a third month. The U.K. economy has shrunk for each of the three quarters through June and gross domestic product figures for the period through September are due on Oct. 25. Ten-year gilts advanced for the third time in four weeks. “The U.K. fundamental picture is deteriorating,� said Ian Stannard, the head of European foreign exchange strategy at Morgan Stanley in London. “We are quite bearish on sterling. It is likely to underperform because its current level doesn’t fully reflect those fundamentals.� The pound dropped 0.4 percent this week to $1.6077 as of 5:04 p.m. in London. It has lost 1 percent in the past three weeks. Sterling strengthened 0.3 percent to 80.54 pence per euro, after reaching 81 pence on Oct. 9, the weakest level since Sept. 17. It declined 0.8 percent from the end of last week to 125.89 yen. Morgan Stanley forecast the pound will weaken to $1.59 by the end of March. Economic Contraction The International Monetary Fund forecast on Oct. 9 that the U.K. economy will contract 0.4 percent this year before expanding 1.1 percent in 2013. It previously projected growth of 0.2 percent and 1.4 percent, respectively. Bank of England Monetary Policy Committee member Martin Weale said the country could face a triple-dip recession, the Daily Mail reported on Oct. 11, citing an interview. The 10-year gilt yield dropped five basis points, or 0.05 percentage point, this week to 1.72 percent. The rate climbed to 1.80 percent on Oct. 11, the highest since Sept. 25. The 1.75 percent bond due in September 2022 rose 0.445, or 4.45 pounds per 1,000-pound face amount, to 100.26. The yield on two-year gilts was little changed at 0.21 percent. Gilts may gain next week before a report that economists said will show inflation slowed last month. Consumer prices rose an annual 2.2 percent in September, compared with 2.5 percent in August, according to the median forecast of 37 analysts in a Bloomberg News survey. The data will be published on Oct. 16. The U.K. Debt Management Office is scheduled to sell 3.75 billion pounds of 4.5 percent gilts due in 2019 on Oct. 18. The nation last sold those securities on May 1 at an average yield of 1.495 percent. They yielded 0.93 percent yesterday. Gilts returned 2.7 percent this year through Oct. 11, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3 percent and U.S. Treasuries rose 2.2 percent. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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