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Pound Falls to Four-Week Low Versus Euro After Factory Report

The pound dropped to a four-week low against the euro after a gauge of U.K. manufacturing stayed near the lowest in 10 months, adding to concern the economy is struggling to recover.

Sterling dropped versus all except two of its 16 major counterparts after Bank of England Governor Mervyn King told a parliamentary commission that the uncertainty of regulatory fines levied on British lenders was weighing on their ability to raise finance. U.K. government bonds were little changed as the Debt Management Office sold 3.25 billion pounds ($5.18 billion) of index-linked bonds though banks.

“Although sterling has received some support from the situation in the euro zone, there are some challenges in terms of U.K. economic fundamentals that could limit any rebound in sterling,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “We expect more negative headlines on the data and fiscal fronts and that should continue to put pressure on the pound.”

The U.K. currency depreciated 0.5 percent to 80.82 pence per euro at 4:32 p.m. London time after sliding to 80.86 pence, the weakest level since Oct. 25. The U.K. currency dropped 0.1 percent to $1.5937.

Morgan Stanley predicts the pound will decline to 83 pence per euro by March, Stannard said.

The Confederation of British Industry’s factory orders index was at minus 21 this month from minus 23 in October, which was the lowest since December 2011. A measure of manufacturers’ output expectations for the next three months slid to minus 9, the lowest this year, from 12.

Third Worst

Sterling has weakened 2.1 percent in the past six months, the third-worst performer after the dollar and yen of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar dropped 3.3 percent and the yen slid 6.6 percent.

Fines levied on U.K. banks including over the manipulation of Libor is hurting their ability to raise funds, King told lawmakers at a hearing of the Parliamentary Commission on Banking Standards in London.

“One of the additional burdens on banks at present, for which they will need to provide capital, is the increasing consequence of regulatory fines of all kinds, not just Libor,” King said. “The problems may not be confined to Libor, but to commodity markets or other areas.”

The pound is poised to extend its decline against the euro to the weakest since June after it dropped through a level of so-called support of 80.78 pence today, Credit Suisse Group AG said, citing trading patterns.

The U.K. currency may fall to 81.66 pence, the low set on Oct. 22, after sliding beyond the low of Oct. 31, analysts including David Sneddon in London, wrote in a note to clients.

U.K. Gilts

The yield on the benchmark 10-year gilt declined one basis point, or 0.01 percentage point, to 1.84 percent. The price of the 1.75 percent bond due in September 2022 rose 0.075, or 75 pence per 1,000-pound face amount, to 99.16.

Ten-year yields will climb to 2.25 percent by the end of June as the British economy recovers and after the Bank of England halted its asset-purchase program this month, according to JPMorgan Chase & Co.

“After a disappointing 2012, we expect a low pick-up in the U.K. economy over 2013, driven predominantly by an improving global backdrop,” JPMorgan strategist Francis Diamond in London wrote in a research note yesterday. “We think that the BOE’s quantitative-easing program has ended and that monetary policy will be kept unchanged over 2013.”

The DMO said it sold the index-linked gilts due in March 2044 at a real yield, or return adjusted for inflation, of 0.331 percent. Bank of America Corp., Deutsche Bank AG, HSBC Holdings Plc and Nomura International Plc led the sale.

Gilts returned 2.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.4 percent and U.S. Treasuries earned 2.4 percent.

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