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Pound Declines Against Euro Amid Optimism Debt Crisis is Abating

The pound fell for a third week versus the euro, touching the lowest level in more than a month, as bets European policy makers are taking steps to stem the debt crisis damped demand for the safety of U.K. assets.

Sterling was little changed against the dollar after a report showed gross domestic product rose 1 percent in the third quarter, matching an earlier estimate. The German parliament yesterday approved the latest rescue package for Greece after euro-region finance ministers’ Nov. 27 agreement to ease the terms of the nation’s bailout. Gilts rose as Bank of Canada Governor Mark Carney was unexpectedly appointed as the next head of the Bank of England.

Sterling’s decline against the euro is “a function of improving short-term European sentiment over Greece,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “Carney is well respected. I would suggest the appointment is good for U.K assets in the longer term.”

The pound fell 0.3 percent from Nov. 23 to 81.18 pence per euro at 4:54 p.m. London time yesterday after depreciating to 81.33 pence, the weakest level since Oct. 24. The U.K. currency was little changed on the week at $1.6023, after touching $1.6063, the most since Nov. 2.

Sterling has weakened 1.4 percent in the past six months, the third-worst performer after the yen and the dollar among the 10 developed-market currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen fell 9.6 percent, the dollar dropped 5.1 percent and the euro rose 0.4 percent.

Sterling Negative

“The picture for sterling is going to turn more negative,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said Nov. 29. “Sterling has been relatively well supported by safe-haven flows from Europe but these flows are slowing. That is going to expose sterling to its underlying fundamentals, which I don’t think are positive.”

There may be further evidence the U.K. economy is stalling next week, with a report economists say will show manufacturing contracted for a seventh month in November. A gauge based on a survey of purchasing managers was at 48 from 47.5 in October, Markit Economics and the Chartered Institute of Purchasing and Supply will say in London on Dec. 3, according to the median of 32 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

The benchmark 10-year gilt yield fell seven basis points, or 0.07 percentage point, this week to 1.78 percent. The 1.75 percent bond due September 2022 rose 0.47, or 4.70 pounds per 1,000-pound face amount, to 99.78.

Bank of England policy makers will maintain their asset- purchase target at 375 billion pounds when they meet on Dec. 5-6, according to all 36 economists in a Bloomberg News survey. Deputy Governor Charles Bean said on Nov. 28 officials should keep open the option to expand stimulus.

Gilts returned 3.5 percent this year through Nov. 29, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.8 percent and U.S. Treasuries rose 2.7 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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