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Pound Pares Monthly Drop Versus Euro on Dutch Deficit Forecast

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Feb. 28 (Bloomberg) -- The pound advanced against the euro, paring a seventh monthly decline, as the Netherlands said it will breach European Union deficit limits, boosting demand for the U.K. currency as an alternative to euro-area assets.

Sterling pared its steepest monthly decline since May versus the dollar as the Dutch announcement signaled region’s nations are struggling to grow fast enough to cut their debts. The U.K. currency has fallen versus all but one of its 16 major peers in February after gross domestic product shrank last quarter and Moody’s Investors Service cut the nation’s credit rating.

“Sterling is going to pick up again as a safe haven as we see more worries about the euro region,” said Eimear Daly, a currency-market analyst at Monex Europe Ltd. in London. “People may also be thinking the U.K. situation isn’t as bad as they expected. I do see some more sterling strength coming back into the picture.”

The pound strengthened 0.5 percent to 86.20 pence per euro at 4:10 p.m. London time, trimming this month’s decline to 0.5 percent. Sterling fell to 88.15 pence on Feb. 25, the weakest level since October 2011. The U.K. currency rose 0.1 percent to $1.5175. It has still lost 4.3 percent in February.

Daly predicts sterling will appreciate to $1.53 and 84 pence per euro by the end of March. The median estimate in Bloomberg surveys of economists is for the currency to trade at $1.56 and 85 pence.

‘Shorting Sterling’

Sterling has depreciated 5.1 percent this year, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2.5 percent and the euro rose 1.5 percent.

“The market is positioned close to its limit in terms of shorting sterling, so for the pound to move lower it needs fresh sell factors,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “Negative GDP, further quantitative easing and downgrades were heavy forces weighing on the currency, but I suggest these are now fully priced into the market.”

A short position is a bet an asset will decline.

The 10-year gilt yielded 1.97 percent after the rate fell to 1.93 percent yesterday, the lowest since Jan. 2. The 1.5 percent security due in September 2022 traded at 98.10.

The benchmark yield has declined 14 basis points since Moody’s lowered the U.K.’s rating to Aa1 from Aaa on Feb. 22. Investors including Pacific Investment Management Co. and Ignis Asset Management said the decision was unlikely to have a material impact on the country’s government bonds.

Britain’s economy shrank 0.3 percent in the fourth quarter after expanding 0.9 percent in the previous three months, the Office for National Statistics said yesterday. The office revised its full-year data and said the economy grew 0.2 percent in 2012 instead of stagnating.

U.K. government bonds lost 1.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 0.5 percent and Treasuries fell 0.3 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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