Pound Resumes Drop Versus Euro; ECB Extending Stimulus Bolsters Sentiment

The pound dropped against the euro after the European Central Bank decided to postpone its exit from extraordinary stimulus measures to help stem Europe’s sovereign-debt crisis.

Sterling had recovered earlier against the single currency after ECB President Jean-Claude Trichet refrained from announcing so-called quantitative easing to support bonds of nations such as Ireland and Spain, disappointing some traders. The pound later resumed its descent. Trichet said the ECB will delay withdrawing its current support until at least April to combat “acute” market tensions. Sterling rose versus the euro last month as investors sought a haven from euro assets, and yesterday reached a two-month high.

“The fact that there is going to be this three-month refinancing operation in some people’s minds does at least abate the fears that the ECB are going to turn a blind eye to the troubles in the euro zone,” said Elizabeth Gregory, a market strategist at ACM Advanced Currency Markets in Geneva.

The pound traded 0.8 percent lower at 84.76 pence per euro as of 5.27 p.m. in London. It yesterday touched the strongest since Sept. 20. Sterling slipped 0.1 percent versus the dollar to $1.55604, after earlier declining 0.7 percent.

Trichet said the ECB will keep offering banks unlimited loans through the first quarter. Seven-day, one-month and three- month operations will be tied to the ECB’s benchmark rate, he said at a press conference in Frankfurt. The bank left its key rate at 1 percent for a nineteenth month.

‘Inaction’

The bank’s “inaction” to prevent the spread of the euro area’s debt woes will provide investors with little comfort, according to High Frequency Economics Ltd.

U.K. government bonds fell, pushing the 10-year yield up two basis points to 3.39 percent. The 4.75 percent security maturing March 2020 fell 0.16, or 1.6 pounds per 1,000-pound ($1,560) face amount, to 110.74. The two-year note yield rose one basis point to 1 percent.

Gilts have returned 6.8 percent this year, compared with a 7 percent gain for German bonds and 7.1 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Sterling has weakened 4.7 percent against a basket of its developed-country peers this year, according to Bloomberg Correlation-Weighted Currency Indexes, making it the third- worst-performing currency after the euro and Norwegian krone. It has fallen 0.1 percent in the past month.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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