Pound Falls Third Day After Climbing to Two-Year High This Week

The pound fell for a third day versus the dollar on speculation its advance to a two-year high this week was overdone and as Bank of England Chief Economist Spencer Dale said interest rates will stay low.

Sterling dropped versus all of its 16 major peers as Dale said the central bank will only increase borrowing costs following a sustained period of economic growth. Policy makers have pledged to keep the key rate at a record-low 0.5 percent until unemployment, currently at 7.6 percent, falls to 7 percent. The pound has risen almost 10 percent versus the dollar from this year’s low in July amid bets improving growth will lead to a rate increase. U.K. bonds were little changed.

“We’ve seen the pound give back some of its recent strong gains over the past week,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s a good reflection that the pound had got ahead of itself in strengthening in the near term but we are still confident that overall strengthening trend remains in play.”

The pound weakened 0.4 percent to $1.6289 at 4:25 p.m. London time after climbing to $1.6466 on Dec. 10, the strongest level since August 2011. The U.K. currency fell 0.2 percent to 84.28 pence per euro, having slipped 0.5 percent this week.

The pound has appreciated 5.5 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.5 percent and the dollar advanced 1.5 percent.

‘Far Stronger’

“We will tighten policy only when we are well along the road to recovery,” Dale said in the text of a speech delivered at a Confederation of British Industry East of England event in Newmarket. “Yes: interest rates will rise at some point. But only against a far stronger economic backdrop.”

Dale’s comments echoed those of Governor Mark Carney earlier this week, who said in New York he wants to avoid a premature withdrawal of stimulus. Dale also noted the potential risks to the economy from the revival in the property market.

U.K. home prices climbed 0.6 percent from October, real-estate research company Acadametrics and LSL Property Services Plc said in a report today. Construction rose 2.2 percent after falling a revised 0.5 percent in September, the Office for National Statistics said. Economists had predicted an increase of 1.6 percent.

‘Encouraging’ Data

“The macro-data in the U.K. is encouraging and that trend will continue next year,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London. “I would expect to see a resumption on the upside for the pound.”

The U.K. currency will strengthen to $1.70 by the middle of next year and $1.75 by the end of 2014, Jones said. The U.K. currency will appreciate to 77.50 pence per euro by the end of next year, he said.

The 10-year gilt yield was at 2.90 percent after rising to 2.98 percent on Dec. 6, the highest level since Sept. 18. The price of the 2.25 percent bond due in September 2023 was 94.53.

The Debt Management Office said today it will auction a new 10-year gilt due in 2024 in March. The office also plans to sell inflation-linked securities maturing in 2068 via banks in January, it said in its first-quarter issuance plan.

Gilts handed investors a loss of 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities fell 1.8 percent and U.S. Treasuries declined 2.9 percent.

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