Pound Weakens Versus Dollar as Rate Speculation Wanes

The pound declined for a second day against the dollar, after reaching a nine-month high this week, amid speculation the economic recovery isn’t strong enough to warrant an early interest-rate increase.

Britain’s currency dropped at least 0.4 percent versus all of its 16 major peers as Bank of America Merrill Lynch said sterling’s recent strength “is likely to subside.” Bank of England policy makers, who meet next week, have said they will keep interest rates at a record low at least until unemployment falls to 7 percent. U.K. government bonds fell with Treasuries amid speculation U.S. lawmakers will resolve a budget standoff, damping demand for safer assets.

“Some of the momentum in the early rate hike argument has been lost,” said Jane Foley, senior currency strategist at Rabobank International in London. “There’s realism coming through because the pound has strengthened so much and there are obvious headwinds facing the economy. People are taking off some of their long positions, in case we see a negative shock,” she said, referring to bets an asset will gain.

The pound dropped 0.5 percent to $1.6069 at 4:39 p.m. London time after rising to $1.6260 on Oct. 1, the highest level since Jan. 2. The U.K. currency weakened 0.4 percent to 84.59 pence per euro, having fallen 1 percent this week.

Sterling jumped 4.4 percent versus the dollar in September as improving economic data prompted investors to increase bets the Bank of England will raise borrowing costs earlier than it has predicted. Services activity expanded last month and house prices climbed, reports showed this week.

‘Really Growing’

“We’re not going to begin to think about raising interest rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing,” central bank Governor Mark Carney said in an interview with ITV Anglia broadcast on Oct. 2.

The Bank of England will keep its benchmark rate at 0.5 percent and leave its asset-purchase target at 375 billion pounds when it announces its next policy decision on Oct. 10, Bloomberg News surveys show.

“Growth expectations from leading indicators are extremely high and unlikely to be sustained in the medium term,” Bank of America economist Nick Bate and strategist Naeem Wahid in London wrote today in a research note to clients. “Similarly, the ability of economic data to positively surprise is also declining. This suggests that the recent outperformance of sterling is coming to an end.”

Surprise Index

Citigroup Inc.’s Economic Surprise Index for the U.K. fell to 49.60 yesterday, the lowest since Aug. 1. The gauge, which shows whether data beat or fell short of forecasts, climbed to a nine-month high of 113.30 on Aug. 19. It was at 50 today.

The pound fell 0.9 percent this week, the worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar dropped 0.4 percent, while the euro rose 0.2 percent.

A bipartisan group of U.S. lawmakers is proposing to House Republican and Democratic leaders a compromise to end the stalemate that has caused a partial government shutdown. Policy makers also face a debate over raising the federal debt limit, which the Treasury has said will be reached on Oct. 17.

The yield on the benchmark 10-year gilt climbed six basis points, or 0.06 percentage point, to 2.73 percent after falling to 2.67 percent on Sept. 30, the lowest since Aug. 27. The 2.25 percent bond due in September 2023 dropped 0.47, or 4.70 pounds per 1,000-pound face amount, to 95.825.

Gilts lost 2.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds dropped 1.6 percent and Treasuries fell 2.4 percent.

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