Pound Falls Most in Three Weeks Versus Dollar on Worsening Economy Outlook

The pound declined the most in three weeks against the dollar and gilts climbed after reports showed business expectations slumped and U.K. house prices fell.

Sterling depreciated from within one pence of a seven-week high against the greenback as separate data showed U.K. mortgage approvals fell in September. The U.K. currency surged as much as 4.1 percent versus the yen after Japan intervened to weaken its currency. It also gained versus the 17-member euro as concern mounted that last week’s European rescue plan may fail to contain the sovereign debt crisis.

“The business barometer was pretty low,” said Chris Walker, a currency strategist at UBS AG in London. “As expectations are so low these bad data readings are having less of an impact but on the margin I would still want to be selling” the pound.

Sterling fell 0.7 percent to $1.6021 at 11:59 a.m. London time after sliding 1 percent, the biggest decline since Oct. 6. The currency advanced to $1.6152 on Oct. 28, the strongest since Sept. 6. The U.K. currency jumped 2.1 percent to 124.85 yen, and gained 0.3 percent to 87.45 pence per euro.

The Stoxx Europe 600 fell 1.2 percent, while the U.K.’s FTSE 100 Index (UKX) slid 1.1 percent.

An index of business expectations for the economic outlook fell 22 points in October from the previous month to minus 15, the weakest since March 2009, according to Lloyds Bank Corporate Markets. A separate report by property researcher Hometrack Ltd. showed the average cost of a U.K. home fell 0.2 percent from September and was down 2.8 percent from a year earlier.

‘Second Fiddle’

A Bank of England report showed lenders granted 50,967 loans to buy homes, down from 52,347 in August. Economists forecast a drop to 50,600, according to the median forecast of 20 economists in a Bloomberg News survey.

The pound has weakened 2 percent in the past month against a basket of nine developed-market peers, extending its decline over the year to 4.4 percent, according to Bloomberg Correlation-Weighted Currency Indexes.

Sterling rose the most since March 18 against the yen after Japan stepped into foreign-exchange markets to weaken the currency for the third time this year.

The pound is “really playing second fiddle to other currencies at the moment,” Walker said. “Whether it’s events in the euro zone or even overnight yen intervention, that’s really been pushing it around.”

The benchmark 10-year gilt yield dropped nine basis points to 2.52 percent, while the two-year note yield was little changed at 0.56 percent.

U.K. non-residents bought a net 12 billion pounds of gilts in September, the most since April 2010, according to data published today by the Bank of England. They sold a net 731 million pounds of the securities in August, the data show.

Gilts have returned 11 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, beating the 6.2 percent for German bunds and 7.3 percent gain for U.S. Treasuries.

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