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Pound Declines to 13-Month Low Versus Dollar; Gilts Advance

The pound fell, reaching its lowest level in more than 13 months against the dollar, as Europe’s sovereign-debt crisis drove investors to the perceived safety of U.S. assets.

Sterling dropped for the sixth day in seven against the dollar, even after a report showed retail sales growth rose for a third straight month in April. It fell to its lowest level since February 2009 against the Japanese yen. Germany limited some forms of speculation on sovereign debt and financial stocks this week, driving the euro lower on concern there’s a lack of unity in policy responses to the sovereign-debt crisis in Europe. Gilts advanced as investors favored government securities as a haven after equities fell.

“Against the backdrop of risk aversion, the dollar benefits as a safe-haven,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “There was muted reaction to the retail sales data, but sterling’s in a bit of a drift period.”

The pound declined 0.9 percent to $1.4315 at 4:12 p.m. in London. It fell earlier to $1.4231, its lowest level since March 30, 2009. Sterling depreciated 0.4 percent to 86.27 pence per euro, and dropped 3.2 percent to 128.23 yen, after touching 126.77 yen earlier.

Retail sales climbed 0.3 percent in April, the Office for National Statistics said today. That’s down from a revised 0.5 percent gain in March, and above the median 0.2 percent increase forecast by 20 economists in a Bloomberg survey.

Budget Deficit

Concern the U.K. will struggle to reduce its budget deficit, which at more than 11 percent of gross domestic product is the biggest in the Group of Seven nations, has helped push the pound 5.1 percent lower this year, according to Bloomberg Correlation-Weighted Indexes.

Prime Minister David Cameron’s newly formed coalition government plans 6 billion pounds ($8.6 billion) in spending cuts in an emergency budget on June 22.

“U.K. data releases are likely to have limited impact before the budget,” Mellor said. “The real test for sterling will come later in the year, when the government begins to take back some of its fiscal stimulus.”

Bank of England policy makers, led by Governor Mervyn King, voted unanimously to keep the key interest rate at a record low 0.5 percent and to leave bond-buying operations on hold at 200 billion pounds, minutes of the May 10 meeting showed yesterday.

Gilts rose as the FTSE 100 Index of equities declined as much as 3.1 percent.

Yields Slide

Demand for safer securities sent the 10-year gilt yield eight basis points lower to 3.57 percent. It earlier reached 3.53 percent, the lowest since Dec. 1, according to Bloomberg generic data. The 4.75 percent security due March 2020 gained 0.7, or 7 pounds per 1,000-pound ($1,432) face amount, to 109.72.

The two-year yield fell three basis points to 0.84 percent, after slipping to 0.80 percent, the lowest since Nov. 11.

The Debt Management Office, which handles bond sales for the U.K. Treasury, sold 3.25 billion pounds of 2020 bonds at an average yield of 3.68 percent. Investors bid for 1.76 times the amount of securities on sale, down from a bid-to-cover ratio of 1.9 at the previous auction of the same bond on April 22.

The U.K. government plans to sell 187.3 billion pounds of gilts this fiscal year. The country sold a record 227.6 billion pounds of government bonds in the last financial year.

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