Pound Falls to 2 1/2-Year Low Versus Dollar on Policy Concern

The pound declined to a 2 1/2-year low versus the dollar and dropped against the euro this week amid investor concern that U.K. policy makers are struggling to avoid an unprecedented triple-dip recession.

Prime Minister David Cameron rejected suggestions that cutting taxes or increasing spending would help the economy and called on the Bank of England to aid growth. The central bank left its program of asset purchases designed to boost the economy unchanged on March 7 amid speculation its remit may be changed to allow more monetary easing. Gilts had their biggest weekly drop since the start of the year.

“I’m struggling to find any sort of scenario which would be sterling positive at this stage,” said Ian Stannard, London-based head of European foreign-exchange strategy at Morgan Stanley. Cameron’s comments “very much go along the lines that the government is looking to monetary policy to offset the negative impact of further fiscal consolidation. We’d expect sterling to remain under pressure.”

The pound declined 0.7 percent in the week to $1.4928 at 4:45 p.m. London time yesterday when it slid to $1.4885, the weakest level since July 1, 2010. Sterling slipped 0.5 percent to 87.05 pence per euro.

The U.K. currency will weaken toward $1.46 within the next few weeks, Stannard said.

Asset Purchases

The pound has dropped 6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.

BlackRock Inc. said on March 7 that it sold the U.K. currency after the Bank of England left its asset-purchase program at 375 billion pounds because the company questions Britain’s leaders’ ability to stimulate growth.

The pound has had its worst start to the year since 1992 against the dollar as investors bet the central bank will boost stimulus while also debasing the currency as the U.K. risks an unprecedented triple-dip recession.

U.K. government bonds fell for the first week in three after the central bank’s decision and as a report showed Britons’ expectations for inflation in the coming year rose slightly. Consumers questioned last month anticipated prices would increase 3.6 percent over the following year. Inflation was at 2.7 percent in January, in breach of the Bank of England’s 2 percent limit.

The 10-year gilt yield rose 19 basis points, or 0.19 percentage point, to 2.06 percent. The 1.75 percent security due September 2022 slid 1.63, or 16.30 pounds per 1,000-pound face amount, to 97.32. The rate on two-year securities gained four basis points to 0.26 percent.

U.K. government bonds lost 1.4 percent this year through March 7, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds and Treasuries both dropped 0.8 percent.

The National Institute of Economic and Social Research publishes its estimate for February gross domestic product on March 12. It cut its 2013 growth forecasts on Feb. 5 to 0.7 percent after a 1.1 percent prediction in November.

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