Pound Drops as Carney Says Currency’s Advance May Hamper Exports

The pound fell from a 2 1/2-year high against the dollar as Bank of England Governor Mark Carney said the currency’s strength may harm exports and pledged to keep down interest rates to support the economic recovery.

Sterling declined the most in seven weeks against the euro as Carney said in a speech in Davos, Switzerland, that policy makers will consider ways to update their guidance on the future path of interest rates bearing in mind a more “benign inflation outlook.” U.K. government bonds advanced, with 10-year yields falling to a two-month low.

“Carney rocked the apple cart by stating that the BOE did not need to hike rates and as such the pound has sold off,” said Peter Kinsella, a currency strategist at Commerzbank AG in London. “One has to expect more jawboning and verbal interventions from the BOE, because it’s the only thing they can do to talk down the pound. Whether they are successful over the longer term is a different matter. People betting on a decline in the pound are going to be proven wrong, again, as they were last year.”

The pound declined 0.9 percent to $1.6485 at 4:55 p.m. London time after climbing to $1.6668, the highest level since May 2011. It has gained 0.4 percent versus the U.S. currency this week. Sterling fell 0.8 percent to 82.96 pence per euro, the biggest one-day slide since Dec. 5. It appreciated to 81.68 pence on Jan. 22, the strongest since Jan. 10, 2013.

U.K. Unemployment

Sterling has gained 9 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, on bets the expanding economy will prompt the central bank to raise rates sooner than planned. The euro advanced 6.4 percent and the dollar gained 3.9 percent.

“The market’s love affair with pound is doomed to fail,” David Bloom, global head of currency strategy at HSBC Holdings Plc in London, wrote in an e-mailed report today. “We are more than happy to retain our substantially below-consensus forecast that pound-dollar will finish 2014 at a lowly $1.50.”

The median estimate of analysts surveyed by Bloomberg is for sterling to fall 3 percent to $1.60.

A Jan. 21 report showed U.K. unemployment declined to 7.1 percent in the three months through November, approaching the 7 percent threshold at which Bank of England officials have said they will review borrowing costs.

Yields Slide

Short-sterling futures rose as investors pared bets that interbank borrowing costs will increase, with the implied yield on longer-dated contracts declining more than those on shorter maturities.

The yield on the contract expiring in December 2015 dropped eight basis points, or 0.08 percentage point, to 1.65 percent, while the implied rate on the December 2014 contract slipped one basis point to 0.84 percent.

Gilts advanced with German bunds and Treasuries as investors sought the safest assets amid concern growth is slowing in emerging markets.

The 10-year gilt yield fell four basis points to 2.77 percent after dropping to 2.73 percent, the lowest since Nov. 27. The 2.25 percent bond due in September 2023 climbed 0.3, or 3 pounds per 1,000-pound face amount, to 95.661.

Data showing a contraction in Chinese manufacturing, anti-government protests in Ukraine and Thailand and a corruption investigation in Turkey involving Prime Minister Recep Tayyip Erdogan’s cabinet undermined investors’ confidence in emerging-market assets.

Germany’s 10-year yield decreased five basis points to 1.66 percent after falling to 1.64 percent, the lowest since Aug. 5. The rate on similar-maturity Treasuries slid five basis points to 2.73 percent.

Gilts returned 1.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries gained 1.2 percent and German securities earned 1.1 percent.

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