Pound Reaches Six-Week Low Versus Euro as Construction Declines

The pound depreciated against the euro, reaching its weakest level in six weeks, as a report showed U.K. construction output unexpectedly dropped in August.

Sterling erased a gain versus the dollar even amid optimism U.S. lawmakers will reach an agreement on raising the nation’s debt limit to avert a default. Construction slipped 0.1 percent from July compared with a 0.8 percent gain forecast by economists. The Bank of England yesterday kept its benchmark interest rate at a record-low 0.5 percent and maintained its bond-buying target at 375 billion pounds ($599 billion). U.K. government bonds advanced.

“A lot of good news on the U.K. economic front is already in the price,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “The momentum has certainly come a bit lower after strong upward surprises in the past few months. While it’s unlikely we are going to see very poor data out of the U.K., I would expect some sterling weakness in the near term.”

The pound depreciated 0.4 percent to 85.02 pence per euro at 4:34 p.m. London time after reaching 85.10 pence, the weakest since Sept. 2. Sterling was little changed at $1.5950 after falling to $1.5914 yesterday, the lowest since Sept. 18.

The Bank of England’s Monetary Policy Committee, led by Governor Mark Carney, said in August it would keep interest rates low until unemployment, currently at 7.7 percent, falls below 7 percent.

Homebuilding Surge

The decline in construction output was limited by a surge in homebuilding, data published by the Office for National Statistics showed. New private house building increased 1.6 percent on the month and 18.1 percent from a year earlier, the biggest annual increase since June 2011.

Citigroup Inc.’s Economic Surprise Index for the U.K. dropped to 27.3, the lowest since July 16. The gauge, which shows whether data beat or fell short of economists’ forecasts, reached a nine-month high of 113.30 on Aug. 19.

U.K. home values rose to a record last month, increasing 0.5 percent from August to an average 235,534 pounds, London-based real-estate researcher Acadametrics and LSL Property Services Plc (LSL) said.

House prices were driven partly by Prime Minister David Cameron’s Help-to-Buy plan aimed at aiding first-time buyers as it gives people a chance to purchase a home with a down payment of as little as 5 percent of the property’s value.

Bubble Criticism

The plan has attracted criticism it will fuel a bubble in Britain. Two thirds of 31 economists in a Bloomberg News survey published today described the measure as bad. While the government and the Bank of England say the property market is recovering from very low levels of activity, house-price growth is outpacing inflation and incomes, raising questions about how much support is needed.

Sterling was little changed in the past week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 0.3 percent and the euro strengthened 0.4 percent.

Losses today were limited as Westpac Banking Corp. (WBC) agreed to buy Lloyds Banking Group Plc (LLOY)’s Australian assets. Tighter capital rules following the 2008 financial crisis have prompted European and U.S. lenders to retreat from the Asia-Pacific region.

The transaction valued at A$1.45 billion ($1.37 billion) includes an A$8.4 billion leasing and corporate loan portfolio, Sydney-based Westpac, Australia’s second-largest lender by market value, said.

Currency Benchmarks

FTSE Group, the compiler of Britain’s FTSE 100, is reviewing the currency benchmarks it uses to value its global stock indexes amid a widening investigation into alleged manipulation of the $5.3 trillion-a-day foreign exchange market, according to three people with knowledge of the plan.

The 10-year gilt yield dropped two basis points, or 0.02 percentage point, to 2.74 percent. The 2.25 percent bond due in September 2023 rose 0.125, or 1.25 pounds per 1,000-pound face amount, to 95.82. The rate on two-year gilts was little changed at 0.44 percent.

The Debt Management Office announced today that Credit Suisse Group AG, JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and Societe Generale SA will lead a sale of gilts maturing in 2068. The offering will take place in the week starting Oct. 21, the debt office said.

Gilts lost 3.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2 percent and U.S. Treasuries declined 2.6 percent.

To contact the reporter on this story: 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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