The pound declined the most against the dollar in three months as investors bet a rally that pushed the U.K. currency to a four-year high this week boosted the appeal of U.S. assets over those in Europe.
Sterling strengthened for a second week versus the euro after U.K. manufacturing production expanded more in March than economists predicted and the National Institute of Economic and Social Research raised its forecast for Britain’s growth. U.K. 10-year government bond yields rose above rates on similar-maturity Irish debt amid speculation the Bank of England is moving closer to raising interest rates while the European Central Bank considers adding economic stimulus.
“We did see a surge in cable this week but the move is really on its last legs of support levels,” said John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen, referring to the pound-dollar exchange rate. “The market is getting overextended and we are seeing a broad-based recovery in the dollar. The dollar got a boost because of the reaction to the ECB.”
The pound dropped 0.5 percent to $1.6848 at 4:19 p.m. London time, the biggest decline since Feb 3. It rose to $1.6996 on May 6, the highest since August 2009. Sterling was little changed at 81.66 pence per euro, having appreciated 0.7 percent this week, the biggest gain since the period ended April 18.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.5 percent to 1,008.02 after dropping to 1,000.59 yesterday, the lowest since Oct. 28.
Britain’s currency jumped 9.2 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as spreading economic growth boosts bets the Bank of England will raise interest rates. The euro gained 5.2 percent, while the dollar weakened 0.8 percent.
Manufacturing output rose 0.5 percent from February, when it increased 1 percent, the Office for National Statistics said today. The median estimate of economists in a Bloomberg News survey was for a gain of 0.3 percent. Industrial production fell 0.1 percent, after rising a revised 0.8 percent the previous month. Analysts forecast a 0.2 percent drop.
The U.K. economy will grow 2.9 percent this year, exceeding its peak in 2008, Niesr said, an increase of 0.4 percentage point from its previous estimate. Gross domestic product will increase 2.4 percent next year as growth is “underpinned by consumer spending,” the institute said.
U.K. GDP rose 1 percent in the three months through April, to 0.17 percent below the pre-recession peak, Niesr said. “Subject to data revisions and the uncertainties surrounding any out of sample predictions, it can reasonably be expected that the peak will be regained within the next month or so,” the institute said in a statement.
Benchmark 10-year gilt yields increased four basis points, or 0.04 percentage point, to 2.69 percent. The 2.25 percent bond due in September 2023 fell 0.335, or 3.35 pounds per 1,000-pound face amount, to 96.425.
The rate on similar-maturity Irish debt dropped as much as four basis points to a record 2.643 percent, below Britain’s for the first time since 2008.
The Bank of England kept its benchmark interest rate at 0.5 percent yesterday, where it has been since March 2009. The central bank will increase its key rate by 25 basis points by April, according to one-month forward contracts on the sterling overnight interbank average, or Sonia.
ECB President Mario Draghi said yesterday officials are “comfortable” about taking further action to stimulate the euro-region economy next month if needed, boosting bonds across the currency bloc.
Gilts returned 3.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Irish bonds earned 6.4 percent in the same period, while U.S. Treasuries gained 2.7 percent.
To contact the reporter on this story: Eshe Nelson in London at email@example.com