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Pound Falls Versus Dollar on Stimulus Concern After Price Report

Aug. 10 (Bloomberg) -- The pound weakened for a second day against the dollar after a report showed producer prices stalled last month, boosting speculation that slower inflation will give the central bank more room to add stimulus.

U.K. government bonds advanced, with 10-year gilts on course for the first weekly gain in three. Separate data showed construction declined less than previously estimated in the three months through June, suggesting the economy may have contracted less than earlier forecast. The Bank of England cut its growth outlook this week and Governor Mervyn King said growth in the near term would be “subdued.”

“Producer prices are showing intensifying disinflationary pressures and that leaves the door open for further monetary easing, which should weaken the pound,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The pound should remain under downward pressure.”

The pound dropped 0.3 percent to $1.5599 at 1:14 p.m. London time, having declined 0.3 percent this week. The U.K. currency was little changed at 78.61 pence per euro, set for a weekly gain of 0.7 percent.

Producer prices were unchanged from June, the Office for National Statistics said. They climbed 1.7 percent from a year earlier, the smallest annual increase since October 2009, the report showed.

Building output fell 3.9 percent in the three months through June, a separate report showed. That compares with a 5.2 percent decline in the first estimate of gross domestic product on July 25, which showed the economy shrank 0.7 percent.

BOE Forecasts

The Bank of England, which left its bond-purchase target unchanged at 375 billion pounds this month, will do all it can to engender a recovery, King said this week.

The pound has declined 3.1 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 0.7 percent and the yen gained 2.8 percent.

Gross domestic product fell 0.7 percent from the first quarter, when it dropped 0.3 percent, according to official data. Today’s building output data revision would mean a 0.1 percentage point upward revision to GDP, the statistics office said today.

The yield on the 10-year gilt fell six basis points, or 0.06 percentage point, to 1.55 percent. The 4 percent bond maturing March 2022 advanced 0.685, or 6.85 pounds per 1,000-pound face amount, to 121.72. Over the week, yields declined one basis point.

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

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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