Pound Weakens Amid Speculation BoE to Boost Liquidity

The pound declined against the dollar and the euro amid speculation the Bank of England will announce plans to boost liquidity among the U.K.’s lenders to increase the flow of credit into the economy.

Sterling fell versus most of its 16 major peers as the Financial Times reported that Chancellor of the Exchequer George Osborne and the central bank may announce measures today. Gilts fell for a fourth day after the Debt Management Office sold 1.5 billion pounds ($2.3 billion) of January 2060 bonds. Benchmark interest rates have been at a record-low 0.5 percent since policy makers cut them by 50 basis points in March 2009.

“The market is expecting some kind of liquidity measures from policy makers after the cut in official base rates did little to bring down borrowing costs in the real economy,” said Ian Stannard, the head of European currency strategy at Morgan Stanley in London. “Although such measures should benefit the economy, people in the market speculate they might involve more policy easing, which could be bad for the pound.”

The pound dropped 0.2 percent to $1.5528 at 11:24 a.m. London time. It reached $1.5269 on June 1, the lowest in almost five months. Sterling weakened as much as 0.3 percent to 81.21 pence per euro before trading at 80.97 pence.

The yield on 10-year gilts rose two basis points, or 0.02 percentage point, to 1.77 percent, having risen 15 basis points since June 8. The 4 percent bond due December 2022 slid 0.165, or 1.65 pence per 1,000-pound face amount, to 119.885.

‘Tight Credit Conditions’

Sterling has lost 2.6 percent in the past month, the worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro lost 0.9 percent while the dollar gained 1.3 percent.

The three-month sterling Libor-OIS spread, a gauge of banks’ reluctance to lend, is at 54.3 basis points today, within six basis points from this year’s high reached in January.

Bank of England Deputy Governor Paul Tucker said on June 12 that U.K. officials may need to do more to ease credit conditions and encourage lending as banks confront the mounting debt crisis in Europe. The central bank has said the turmoil in the euro area, Britain’s biggest trading partner, poses the biggest risk to the economy and financial stability.

“The banks themselves did not bring about the underlying challenges facing the euro area,” Tucker said in a speech in London. “Given the costs to our economy, the authorities, including” the U.K. central bank, “need to consider what more we could do to alleviate tight credit conditions in the U.K.”

Futures Bets

Futures traders have reversed their bets that the pound will gain against the dollar, according to data from the Washington-based Commodity Futures Trading Commission. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 2,867 on June 5. That compared with net longs of 1.475 a week earlier.

Today’s bond sale drew bids for 1.8 times the amount of securities on offer. It was the first time the bond was tapped through an auction after it was sold through banks in October 2009.

Moody’s Investors Service yesterday cut Spain’s credit rating by three steps to Baa3, one level above junk, citing the nation’s increased debt burden. Spain’s 10-year bond yield rose to a euro-era record 6.998 percent today as the nation’s request for aid for its banks fuels speculation the world’s 12th-biggest economy may need a full rescue.

“As the debt crisis deteriorates further, the perception of the pound as a safe haven from trouble there is called into question as the euro zone is Britain’s major trading partner,” Stannard said.

Gilts have outperformed German bonds in the past week, with yield the difference between their 10-year securities narrowing five basis points to 25 basis points.

U.K. government bonds have returned 1.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analyst Societies. Bunds advanced 2.5 percent and Treasuries gained 1.9 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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