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Pound Slumps Most in Four Months as Carney Sends Dovish Signal

The pound slumped the most this week versus the dollar since February amid speculation the Bank of England is ready to maintain stimulus measures that typically debase the currency.

Sterling slid to a two-month low against the euro after the central bank, led by new Governor Mark Carney, signaled it will keep interest rates at a record low for longer than investors had expected. The U.K. recovery “remains weak” by historical standards and rising market borrowing costs pose a threat to the expansion, the BOE said in a statement after its July 3-4 meeting. Gilts fell for a third week as U.S. data yesterday showed employers added more jobs than economists forecast.

“Carney has a track record of being a dove, and he made it clear this week that U.K. rates will stay low,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “That, and the further evidence that the U.S. economic recovery is gaining traction, will continue to add pressure on sterling.”

The pound fell 2 percent this week to $1.4909 at 5 p.m. London time yesterday, the steepest decline since the period ended Feb. 22. It reached $1.4858 yesterday, the lowest level since March 12. Britain’s currency depreciated 0.6 percent to 86.07 pence per euro. It touched 86.33 pence on July 4, the weakest since April 17.

The policy decision was the first by the central bank since Carney became governor on July 1. The nine-member Monetary Policy Committee kept its bond-buying target at 375 billion pounds and the U.K.’s main interest rate at 0.5 percent.

BOE Statement

“The implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy,” the London-based central bank said in a statement. The increase in market interest rates would weigh on the nation’s economic outlook, it said.

Short-sterling futures rose, indicating traders were reducing bets on higher rates. The implied yield on the contract expiring in September 2014 fell seven basis points from June 28 to 0.72 percent.

The pound has weakened 1.8 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro gained 4.8 percent and the dollar strengthened 8.1 percent.

U.S. payrolls rose by 195,000 workers for a second month in June, the Labor Department said in Washington. The median forecast in a Bloomberg survey projected a 165,000 gain.

Ten-year gilt yields rose four basis points, or 0.04 percentage point, this week to 2.49 percent. The 1.75 percent security due in September 2022 fell 0.32, or 3.20 pounds per 1,000-pound face amount to 94.01. The rate reached 2.59 percent on June 24, the highest since October 2011.

The Debt Management Office is scheduled to auction 1.4 billion pounds of inflation-linked gilts due in 2029 on July 9.

Gilts handed investors a loss of 3.1 percent this year through July 4, according to Bloomberg World Bond Indexes. German bonds dropped 1.2 percent and Treasuries declined 2.9 percent, the indexes show.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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