Pound Drops Versus Euro as Home Prices Fuel Stimulus Speculation

The pound weakened against the euro for the first time in three days amid speculation falling house prices will push the economy deeper into recession, increasing bets the Bank of England will buy more assets to spur growth.

Sterling reversed a decline versus the dollar on the first trading day of a public-holiday shortened week. Home values slipped 0.1 percent in August from July, when they also fell 0.1 percent, Hometrack Ltd. said yesterday. Gilts advanced as a report showed Spain’s recession worsened in the second quarter, boosting demand for U.K. securities as a haven from the euro area’s debt crisis.

“When you have quantitative easing speculation, it’s always a burden for the currency,” Lutz Karpowitz, a senior foreign-exchange strategist at Commerzbank AG, said by phone from Frankfurt, referring to the central bank’s bond-purchase program. “There’s always speculation about it and it can’t be ruled out.”

Sterling depreciated 0.3 percent to 79.38 pence per euro at 5:04 p.m. London time after touching 79.55 pence, the weakest level since Aug. 7. The pound was 0.2 percent stronger at $1.5827 after losing as much as 0.3 percent. It fell 0.1 percent to 124.26 yen.

Britain’s currency has lost 1.3 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 1.6 percent and the euro gained 0.6 percent.

Recession Deepened

A government report on Aug. 24 showed U.K. gross domestic product contracted 0.5 percent, compared with a 0.7 percent drop estimated on July 25. That marked the longest run of declines since 2009. Net trade cut 1 percentage point from GDP, the most since 1998.

Bank of England policy makers cut their growth forecasts this month and left the door open to more stimulus, with Governor Mervyn King saying they will do all they can to spur economic expansion. The central bank maintained its bond-buying program at 375 billion pounds at its meeting on Aug. 2.

The yield on the benchmark 10-year gilt fell five basis points, or 0.05 percentage point, to 1.49 percent, after touching 1.48 percent, the lowest since Aug. 6. The 4 percent bond maturing in March 2022 rose 0.495, or 4.95 pounds per 1,000-pound face amount, to 122.225.

Gilts have returned 3.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.8 percent and U.S. Treasuries advanced 2.1 percent.

Debt Struggle

The British securities have been supported as the European sovereign-debt crisis worsened and recessions in euro members including Spain and Italy fueled speculation nations will struggle to manage their debts.

Spain’s gross domestic product fell 0.4 percent from the previous quarter, when it declined 0.3 percent, the Madrid-based National Statistics Institute said today. That’s in line with an estimate of 0.4 percent on July 30, before the institute yesterday revised down data for 2010 and 2011. Consumer spending dropped 1 percent in the quarter.

Catalonia plans to request five billion euros in aid from Spain’s financing facility for regions, an official from the region’s government confirmed in a telephone interview. Spain’s cabinet approved on July 13 the creation of a mechanism to make loans to regions to allow them to meet financial liabilities.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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