Pound Slides Most in 4 Years Versus Dollar on Recession Concern

The pound had its biggest quarterly drop against the dollar in more than four years as the economy’s contraction in the three months through December fueled concern of an unprecedented triple-dip recession.

Sterling declined against all but two of its 16 major counterparts in the quarter ended yesterday. Gross domestic product fell 0.3 percent in the final three months of last year, the Office for National Statistics in London said in January and confirmed in the week. The currency trimmed declines after minutes of the Bank of England’s most recent policy meeting damped speculation for more asset purchases and as Cyprus’s financial crisis boosted demand for U.K. assets as a haven.

“Sterling has come under a lot of pressure in the first quarter,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “The pound recently gained some ground against the euro because of the situation in Cyprus. But it’s unclear how long this recovery will last given the rather poor economic fundamentals and outlook of the U.K.”

The pound slipped 6.7 percent in the first quarter to $1.5172 at 4:56 p.m. London time yesterday, after dropping on March 12 to $1.4832, the weakest since June 2010. The decline this quarter was the most since the three months through December 2008. The British currency slipped 3.9 percent against the euro in the past three months to 84.50 pence.

Disposable Income

U.K. retail sales stagnated in March, the Confederation of British Industry said on March 26. Britons’ disposable income fell in the fourth quarter, the statistics office said the following day.

Lenders approved fewer home loans last month compared with January, a Bank of England report will show on April 2, according to the median prediction of economists surveyed by Bloomberg. A gauge of manufacturing stayed below the 50 level that marks expansion, another survey showed before Markit Economics and the Chartered Institute of Purchasing and Supply release the data on the same day.

Concern that Cyprus’s banking crisis would spread turmoil across the 17 nations that share the euro boosted demand for U.K. assets as a refuge this month, sapping declines in the pound and boosting government bonds.

“Much still depends on what goes on in the euro zone,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “As long as the risks are there gilts will find some support as a less-bad option. That’s probably a better way of putting it than a safe haven.”

Inflation Target

Chancellor of the Exchequer George Osborne said in his budget on March 20 that he would maintain the central bank’s 2 percent inflation target, easing concern he would permit faster price increases that would dent payments from fixed-income assets. Earlier that day, minutes of the central bank’s March meeting showed that some in the nine-member Monetary Policy Committee said more quantitative easing “might also lead to an unwarranted depreciation of sterling.”

The benchmark 10-year gilt yield was at 1.77 percent yesterday after falling to 1.71 percent, the lowest level since Nov. 13. The yield has declined from 1.83 percent on Dec. 31.

U.K. government bonds returned 1 percent this quarter through March 27, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.5 percent and Treasuries were little changed.

With assistance from Anchalee Worrachate in London. Editors: Mark McCord, Nicholas Reynolds

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