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Pound Declines to Six-Week Low Versus Dollar on Fed Speculation

The pound fell for a second week versus the dollar as speculation the Federal Reserve is moving closer to ending its program of asset purchases boosted the U.S. currency against its major peers.

Sterling dropped to a six-week low after Fed Bank of San Francisco President John Williams said on May 16 the U.S. central bank may begin to taper off its monthly asset purchases as early as this summer. The U.K. currency was little changed versus the euro after Bank of England Governor Mervyn King said the Monetary Policy Committee raised its forecast for U.K. growth in the last Inflation Report before he’s replaced by Mark Carney. U.K. government bonds were also little changed.

“The dollar has been dominating the pound and that will continue to be the case,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London. “The relative growth outlook is better in the U.S. Sterling could also weaken on its own as the market pre-empts whether Carney will be more aggressive before the next Inflation Report.”

The pound fell 1.2 percent in the week to $1.5170 at 5:15 p.m. London time yesterday after dropping to $1.5158, the lowest level since April 4. Sterling was at 84.49 pence per euro, from 84.57 pence on May 10.

The U.S. central bank may reduce its $85 billion in monthly bond-buying amid signs the economy is gaining strength, the Fed’s Williams said. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, rose yesterday to the highest since July 2010.

Slowing Inflation

An economic recovery is in sight in the U.K., King said on May 15, as the Bank of England raised growth projections and lowered its forecasts for inflation. Reports next week will show the pace of consumer-price increases slowed in April while retail sales rose, according to Bloomberg surveys of economists.

Minutes from this month’s Bank of England monetary-policy decision, when officials left the main rate at 0.5 percent and kept the size of their asset-purchase program at 375 billion pounds, are scheduled for release on May 22.

Sterling has depreciated 2.3 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 5.5 percent and the euro gained 2.1 percent.

U.K. 10-year gilt yields ended the week at 1.88 percent, from 1.89 percent on May 10. The price of the 1.75 percent bond maturing in September 2022 was at 98.86.

Gilts handed investors a 1.5 percent loss this month through May 16, trimming gains this year to 0.2 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

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