The pound dropped for a second week against the dollar as Bank of England Governor Mervyn King said the economy was “too weak to be satisfactory,” underpinning bets the central bank will keep monetary policy loose.
Sterling had its biggest weekly decline versus the euro in a month as central bank policy maker David Miles renewed his call for additional asset purchases that tend to devalue a currency. U.S. policy makers this week also sought to ease concern they are moving toward ending quantitative easing. U.K. government bonds fell this week, pushing yields to the highest since October 2011.
“Central bankers have been trying to calm markets after a fairly volatile period,” said Kasper Kirkegaard, a senior foreign-exchange analyst at Danske Bank A/S (DANSKE) in Copenhagen. “It will be difficult for the market to price in expectations of tighter policy in the U.K., which means that there should be some downside risks for sterling against the dollar.”
The pound dropped 1.5 percent this week to $1.5187 as of 5:19 p.m. London time yesterday after sliding to $1.5166, the lowest since May 31. The U.K. currency declined 0.6 percent to 85.61 pence per euro, the biggest weekly loss since the period ended May 24.
Sterling will weaken to $1.46 in the next six months, Danske Bank’s Kirkegaard predicted. The currency last traded at that level in June 2010.
“There is a recovery, but my view is that it’s not sufficiently rapid enough,” King, who will be replaced by former Bank of Canada Governor Mark Carney on July 1, told lawmakers at the Treasury Select Committee in London on June 25. “It’s too weak to be satisfactory.”
Miles told a conference in London the following day that monetary policy needed to provide further support and a “slight expansion” of the quantitative-easing program would be helpful.
Policy makers will maintain the asset-purchase target at 375 billion pounds and keep the benchmark interest rate at a record-low 0.5 percent at Carney’s first meeting on July 3-4, according to Bloomberg surveys of economists.
We expect Carney “will eventually incorporate more interest-rate guidance into his policy making,” strategists led by Hans Redeker, head of global foreign-exchange strategy at Morgan Stanley in London, wrote in a note to clients yesterday. “With policy rates already very low, this gives the BOE an additional tool for sending a dovish signal, and could weigh on the pound.”
Sterling has weakened 1.1 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The dollar was the best performer, rising 6.6 percent, and the euro strengthened 4.9 percent.
The benchmark 10-year gilt yield climbed three basis points, or 0.03 percentage point, this week to 2.44 percent after rising to 2.59 percent on June 24, the highest since Oct. 31, 2011. The 1.75 percent security due in September 2022 fell 0.21, or 2.10 pounds per 1,000-pound face amount, to 94.33.
U.K. government securities handed investors a loss of 3.4 percent this year through June 27, according to Bloomberg World Bond Indexes. German bonds dropped 1.7 percent and Treasuries declined 2.4 percent.
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