Pound Weakens Versus Dollar on Speculation Fed to Taper Stimulus

The pound fell versus the dollar, extending the biggest weekly drop since July, as signs the U.S. economy is improving fueled speculation the Federal Reserve will remove stimulus that tends to weaken the greenback.

Sterling weakened versus most of its 16 major peers as a gauge of whether British economic data is beating forecasts dropped to the lowest level since June. The pound headed for the steepest weekly gain since September versus the euro as investors bet the European Central Bank will lower interest rates as soon as next week. U.K. government bonds fell for a second day after an industry report showed manufacturing output expanded for a seventh month in October.

“There’s a decline in the pound versus the dollar as the dollar rebounds,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The U.S. data has signaled some upside to U.S. growth and the market is a bit nervous about whether the Fed could taper sooner than it expects. The U.K. economic outlook is still improving but it’s having less of a positive impact on the pound.”

Sterling fell 0.8 percent to $1.5915 at 4:36 p.m. London time. It has declined 1.6 percent versus the U.S. currency this week, the steepest drop since the period ended July 5. The pound was little changed at 84.72 pence per euro. It has climbed 0.8 percent this week, the biggest gain since Sept. 27.

The Citigroup U.K. Economic Surprise Index fell for a seventh day to 17.7, the lowest since June 17. The gauge, which shows whether data beat or fell short of economists’ forecasts, climbed to this year’s high of 113.30 on Aug. 19.

U.S. Strength

In the U.S., the Institute for Supply Management’s manufacturing index climbed to 56.4, the highest since April 2011, from 56.2 a month earlier, the Tempe, Arizona-based group’s report showed today. The median forecast in a Bloomberg survey of analysts was 55.

The U.S. economy shows signs of “underlying strength,” the Fed said on Oct. 30, fueling speculation it will begin reducing its $85 billion monthly bond-buying stimulus sooner than previously expected.

The pound slid 1.1 percent in the past month, the worst performer after Sweden’s krona among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 0.9 percent and the euro climbed 0.5 percent.

The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 2.65 percent. The 2.25 percent bond due in September 2023 fell 0.28, or 2.80 pounds per 1,000-pound face amount, to 96.55. Ten-year yields increased four basis points this week.

‘Robust Number’

An index of U.K. manufacturing, based on a survey of purchasing managers, fell to 56 from a revised 56.3 in September, London-based Markit Economics said. A reading above 50 indicates expansion.

“The data is good, it’s a robust number,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “You’ve got the ECB, which is potentially going to cut rates, making policy more expansionary, and in the U.K. that’s not being done. Activity data seems to be improving and that’s good for the pound” versus the euro, he said.

Gilts returned 0.8 percent in the month, according to Bloomberg World Bond Indexes. Treasuries and German bonds gained 0.5 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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