Pound Slides Most in 12 Weeks Versus Dollar Amid U.S. Recovery

The pound fell the most in 12 weeks against the dollar amid speculation the Bank of England will keep interest rates at a record low while the Federal Reserve withdraws stimulus as the U.S. economy improves.

Sterling slid from a two-year high versus the dollar as an industry report showed British manufacturing growth unexpectedly cooled in December, highlighting headwinds to the recovery. A gauge of U.S. manufacturing released today showed output expanded more last month than economists forecast. U.K. bond yields rose to the highest since July 2011 after Prime Minister David Cameron said almost 1 billion pounds ($1.65 billion) of mortgages had been sought under a policy of cheap home loans.

“There is currently a dollar strengthening taking place, which we believe will continue and is likely to be a feature of 2014,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “Changing growth dynamics in the U.S. and diverging monetary policy between the U.S. and much of the rest of the G-10 are likely to keep the dollar supported,” Stannard said, referring to the Group of 10 nations.

The pound dropped 0.8 percent to $1.6442 at 5:02 p.m. London time from the close on Dec. 31 after climbing to $1.6603, the strongest level since August 2011. The U.K. currency depreciated 0.2 percent to 83.17 pence per euro.

Sterling will weaken to $1.62 by the end of March, Stannard forecasts.

Factory Activity

Markit Economics said its gauge of U.K. factory activity was 57.3 last month from a revised 58.1 in November. A level of 50 divides expansion from contraction. The Institute for Supply Management said its U.S. manufacturing index showed output expanded at the second-fastest pace in more than two years.

The U.K. government received more than 6,000 mortgage applications during the first three months of its Help-to-Buy program, which guarantees loans to those who can only afford a small downpayment, Cameron said yesterday. Economists say data tomorrow will show Britain’s house prices climbed in December and mortgage approvals increased.

The 10-year gilt yield was little changed at 3.03 percent after rising to 3.08 percent, the highest since July 26, 2011. The price of the 2.25 percent bond maturing in September 2023 was 93.525.

“The general theme of an improving global data backdrop, particularly with the U.K. being at the forefront of the economic improvement, means that we will continue to see gilt and U.K. rate underperformance,” said Simon Peck, a fixed-income strategist at Royal Bank of Scotland Group Plc in London.

The benchmark yield will increase to 3.75 percent by the end of 2014, Peck predicted.

U.K. government bonds lost 4.3 percent last year, their biggest annual decline since 1994, according to Bank of America Merrill Lynch Indexes. German securities fell 2.3 percent and U.S. Treasuries declined 3.4 percent.

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