BLBG:Pound Weakens for Second Day Versus Euro After Economy Contracts
The pound fell for a second day against the euro after a government report showed the U.K. economy contracted in the last three months of 2012, sapping demand for the nation’s currency.
Sterling slid for a seventh day against the yen as Bank of England Deputy Governor Charles Bean said it may be appropriate to review the U.K.’s inflation-targeting regime. The pound has overtaken the yen as the world’s worst-performing major currency this year as speculation the Bank of England will add more monetary support to the U.K.’s faltering economy damps demand for sterling. Gilts rose.
“I don’t see why people should buy the pound,” said John Hardy, head of currency strategy at Saxo Bank A/S in London. “Low growth, high inflation and policy outlook should continue to pressure sterling. I need to see signs of more dynamism in the economy and signs of investment coming back to the U.K. to change that view.”
Sterling depreciated 0.1 percent to 86.46 pence per euro at 11:32 a.m. London time after reaching 88.15 pence on Feb. 25, the weakest since October 2011. The pound gained 0.2 percent to $1.5148 after dropping to $1.5073 on Feb. 25, the least since July 2010. It slid 0.3 percent to 138.76 yen.
The economy shrank 0.3 percent in the fourth quarter after expanding 0.9 percent in the previous period, the Office for National Statistics said today. That was in line with the median estimate of 35 economists in a Bloomberg survey.
Inflation Target
The pound depreciated 5.3 percent, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The yen dropped 3.6 percent, while the dollar gained 2.5 percent and the euro rose 1.6 percent.
“It is sensible to review the framework to assess whether” the central bank’s inflation target “is fit for purpose or can be materially improved, though the hurdle for change should be high,” Bean said in a speech in London today.
Fellow Deputy Governor Paul Tucker said yesterday he is open to adding to asset purchases as policy makers stressed the Bank of England has the flexibility to expand stimulus if needed.
The yield on 10-year gilts dropped two basis point, or 0.02 percentage point, to 1.94 percent. The 1.75 percent bond due September 2022 rose 0.2, or 2 pounds per 1,000-pound face amount, to 98.32.
Rating Cut
The gilt yield has dropped 17 basis points since Moody’s Investors Service cut the U.K.’s AAA rating on Feb. 22 as investors including Pacific Investment Management Co., Ignis Asset Management, Aviva Investors and DWS Investment GmbH suggested the ratings move is unlikely to have a material impact on U.K. government bonds.
“We do not expect that the rating cut will result in a badly performing gilt market,” said Andreas Burhoi, a money manager at DWS in Frankfurt, Germany’s biggest mutual fund, which oversees $379 billion. “The Bank of England will provide any needed liquidity to support the gilt market and we expect further stimulus.”
U.K. government bonds lost 1.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 0.5 percent and Treasuries fell 0.3 percent.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
