Pound Falls to 13-Month Low Versus Euro as Growth Shrinks

The pound weakened for a second day versus the euro, falling to a 13-month low, after a report showed the U.K. economy shrank more than analysts forecast in the fourth quarter, damping demand for the British currency.

Sterling declined its weakest level in five months versus the dollar, as the contraction left the U.K. on the brink of an unprecedented triple-dip recession. The euro also strengthened after the European Central Bank said 137.2 billion euros of three-year loans granted to banks to avert the sovereign-debt crisis would be repaid early. Gilts fell for a second day.

“Broad sentiment seems to be that the euro area is doing better and the risks there have come off, whereas the U.K. economy remains weak,” said Raghav Subbarao, a foreign-exchange strategist at Barclays Plc in London. “The move in euro-sterling has been far more than we expected, and from a medium-term perspective it looks a little unjustified.”

The pound depreciated 0.5 percent to 85.18 pence per euro at 4:19 p.m. London time, after touching 85.37 pence, the weakest level since Dec. 12, 2011. Sterling was little changed at $1.5805 after sliding to $1.5746, the least since Aug. 21.

The pound has dropped 2.8 percent this year, the second-worst performer after the yen out of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 2.6 percent and the dollar gained 0.3 percent.

‘Negative View’

Gross domestic product dropped 0.3 percent from the three months through September, the Office for National Statistics said in London. That compared with the median of 38 estimates in a Bloomberg News survey for a decline of 0.1 percent.

Growth in the U.K. is struggling to rebound more than three years after the economy emerged from its deepest recession since World War II, with snow this month raising the possibility of a further contraction in the current quarter. Bank of England Governor Mervyn King said this week policy makers will provide more stimulus if needed.

“I have a negative view on sterling and most of the flows are versus the euro right now,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in London. “The U.K. economy doesn’t look particularly strong. Euro-area tail risks have been unwinding.”

Benchmark 10-year gilt yields rose five basis points, or 0.05 percentage point, to 2.06 percent. The rate increased two basis points yesterday. The 1.75 percent bond maturing in September 2022 fell 0.415, or 4.15 pounds per 1,000-pound face amount, to 97.32.

Inflation Bonds

U.K. gilts handed investors a loss of 1.4 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.3 percent and Treasuries fell 0.3 percent.

Index-linked gilts outperformed nominal securities after the Debt Management Office said today that investors and traders in U.K. government bonds called for an increase in the supply of inflation-linked securities in the next fiscal year.

The 10-year break-even rate, the difference in yield between nominal gilts and inflation-linked bonds, widened three basis points to 3.12 percentage points, and reached 3.15 percentage points, the highest since June 2011.

Before it's here, it's on the Bloomberg Terminal.