Britain's Pound Falls Versus Dollar, Gilts Rise as Libyan Unrest Escalates
The pound fell the most against the dollar in almost a week and gilts rose as escalating political instability in the Middle East and North Africa curbed investor demand for all but the safest assets.
Sterling also weakened versus the Swiss franc and the Japanese yen, government bonds rallied across the world and stocks declined as the Libyan unrest hurt investor demand for assets perceived as being more risky. The pound declined against the euro after European Central Bank council member Yves Mersch said policy makers may toughen their stance on inflation next week, boosting the likelihood of an interest-rate increase in the 17-member bloc.
“The currency market is adjusting to the highly worrying developments in the Middle East,” said Audrey Childe-Freeman, head of European currency strategy at JPMorgan Chase & Co.’s private bank. “The safe-haven assets are doing well, and that leaves sterling in a vulnerable position.”
The pound fell 0.7 percent to $1.6121 as of 4:34 p.m. in London, after dropping to $1.6118, the steepest intraday slide since Feb. 16. Sterling weakened 0.5 percent to 84.75 pence per euro, and by 1.4 percent to 1.5142 Swiss francs.
Oil prices surged amid concern that unrest in Libya, holder of Africa’s biggest crude reserves, may disrupt production. At least 250 people have died in the Libyan capital of Tripoli alone during anti-government protests, which follow the toppling of regimes in Tunisia and Egypt, Al-Jazeera reported.
Gilts Rise
Ten-year gilts climbed for a second day, reducing yields by five basis points to 3.69 percent. The U.K.’s 4.75 percent bond due March 2020 rose 0.36, or 3.60 pounds per 1,000-pound ($1,611) face amount, to 108.1.
Britain’s currency declined 0.4 percent against a basket of nine developed-nation peers, according to Bloomberg Correlation- Weighted Currency Indexes. The declines pared the pound’s advance this year to 3.2 percent versus the dollar and 1.2 percent against the euro, gains that came amid speculation the Bank of England will be forced to raise its main interest rate this year to curb an inflation rate that’s double its target.
Minutes from the central bank’s Feb. 10 meeting, when it kept its benchmark rate unchanged at a record low 0.5 percent, will be released tomorrow. A small increase in the rate may prevent a more rapid tightening later, policy maker Martin Weale said in a BBC Radio 4 interview broadcast yesterday.
“The BOE minutes will be a market mover,” said Childe- Freeman in London. “The Monetary Policy Committee is more split than usual so you could see another MPC member going to the hawkish camp.”
BOE Split
The MPC has been split three ways since October, with Adam Posen calling for an expansion of the bank’s bond-purchase plan and Andrew Sentance voting to raise the key rate by 25 basis points to 0.75 percent. Sentance was joined by Weale at the central bank’s Jan. 13 rate decision.
Money markets signal policy makers may boost the key rate by about 75 basis points by year-end, according to the Sterling overnight interbank average, Tullett Prebon Plc data show. The so-called Sonia rate indicates an increase of about 25 basis points as soon as May.
The implied yield on the December short-sterling futures contract rose two basis points to 1.74 percent, indicating traders raised bets that borrowing costs in the U.K. will increase. The yield was at 1.25 percent on Dec. 31 and reached 1.76 percent on Feb. 15, the most since June.
Calls for higher interest rates in the U.K. come at the same time that Britain attempts to implement the deepest budget cuts since World War II. Prime Minister David Cameron’s coalition government is trying to reduce the fiscal deficit from an estimated 10 percent of gross domestic product in the year through March to 1.9 percent by 2015.
Britain posted its largest budget surplus last month since July 2008 as government revenue surged in the biggest tax- collection month of the year, according to data from the Office for National Statistics today.
Revenue exceeded spending by 3.74 billion pounds in January, compared with a deficit of 1.27 billion pounds a year earlier, the statistics office said. The median of 13 forecasts in a Bloomberg survey was for a surplus of 100 million pounds. The surplus including government support for banks was 5.25 billion pounds.
To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
Rate this Page