Pound Drops Most in 7 Weeks Versus Dollar as GDP Revised Lower

The pound fell the most in seven weeks against the dollar after reports showed Britain’s economy grew less than previously estimated in the third quarter and the budget deficit unexpectedly widened last month.

U.K. 10-year bonds advanced for a second day after an industry group said its measure of consumer confidence dropped in December from an 18-month high, spurring demand for safer assets. Today’s data, which confirmed the economy emerged from recession last quarter, followed the decision by the Office for Budget Responsibility this month to reduce its growth forecasts.

“The U.K. economy is still in a period of stagnation and the improvement in the third quarter is likely to be temporary,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Recent long positions for the pound have been stretched and the currency may come under some pressure as investors adjust those into the year-end.” A long position is a bet an asset will rise.

The pound dropped 0.7 percent to $1.6171 at 4:29 p.m. London time, the biggest decline since Nov. 2. The U.K. currency dropped 0.2 percent to 81.48 pence per euro after depreciating to 81.68 pence on Dec. 19, the weakest level since June 11.

U.K. gross domestic product rose 0.9 percent from the second quarter, down from a previous estimate of 1 percent, the Office for National Statistics said in London. The deficit excluding government support for banks was 17.5 billion pounds compared with 16.3 billion pounds a year earlier.

Sentiment Worsens

London-based research group GfK NOP Ltd. said its sentiment index declined to minus 29 from minus 22 in November, which was the strongest reading since May 2011.

The 10-year gilt yield dropped six basis points, or 0.06 percentage point, to 1.89 percent. The 1.75 percent bond due in September 2022 rose 0.51, or 5.10 pounds per 1,000-pound face amount, to 98.765.

“Gilts rose on expectation that Bank of England may well look at printing more money early next year due to potentially weaker growth in the fourth quarter,” said Michael Hewson, a market analyst at CMC Markets Plc in London.

Gilts returned 1.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.8 percent and Treasuries rose 1.8 percent.

The pound has still gained 1.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.2 percent and the dollar fell 3 percent.

Fourth Year

Sterling is poised for a fourth year of gains versus the euro, and strategists see even more strength in 2013 in a blow to central bankers seeking to bolster flagging U.K. growth.

While outgoing Bank of England Governor Mervyn King said on Nov. 4 the pound’s appreciation was “not a welcome development,” 32 of 48 analysts surveyed by Bloomberg see the currency stronger against the euro by next December. This year’s advance would extend the pound’s winning streak to the longest since the 17-nation euro’s creation in 1999.

“The U.K. economic outlook may not be brilliant, but it’s better relative to that of the euro zone,” said Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York. “The situation in the euro region may have improved, but the crisis is not over. Sterling’s status as a safe haven in the context of Europe is not going to disappear next year.”

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