Pound Extends Biggest Weekly Drop in 4 Months as Policy Diverges

The pound extended its biggest weekly decline versus the dollar in four months as the Federal Reserve raised its interest-rate forecasts while Bank of England officials disagreed on the extent of slack in the U.K. economy.

Sterling weakened versus 13 of its 16 major counterparts today after a government report showed Britain’s budget deficit widened in February as government spending increased. Bank of England policy maker Martin Weale said yesterday spare capacity in the economy may be eroded faster than officials’ forecast shows. Governor Mark Carney said this month spare capacity is “at the upper end” of the range. U.K. government bonds rose, paring a weekly loss.

“The dollar looks like it’s gaining the upper hand,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Copenhagen. “The Fed is on a slightly more hawkish stance than the market is used to. It’s been an interesting play to the downside for pound-dollar after looking like it was trying to make a new high. We’re in a long waiting period in the U.K. as Carney is on the more dovish side over the degree of slack in the economy.”

The pound fell 0.1 percent to $1.6487 at 4:43 p.m. London time, extending this week’s decline to 1 percent, the most since the period ended Nov. 1. Sterling fell 0.2 percent to 83.65 pence per euro after depreciating to 84 pence on March 19, the weakest level since Dec. 25.

Deficit Widens

U.K. expenditure exceeded revenue by 9.3 billion pounds last month compared with 9.2 billion pounds a year earlier, the Office for National Statistics said. The median forecast in a Bloomberg survey was for a deficit of 8.6 billion pounds.

Weale said his analysis of the labor market suggests slack is about 0.9 percent of gross domestic product, less than the range of 1 percent to 1.5 percent the Monetary Policy Committee presented in its quarterly forecasts last month. Spare capacity has been set as a key measure for considering changes to monetary policy since the Bank of England moved away from an unemployment threshold in February.

Fed officials increased their interest-rate forecasts on March 19, predicting the benchmark rate would rise to at least 1 percent at the end of 2015 as Chair Janet Yellen said borrowing costs could start rising “around six months” after the central bank stops buying bonds. The Fed reduced the monthly pace of bond purchases and said reductions would continue “in further measured steps.”

The pound declined 0.7 percent this year, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 0.2 percent, while the dollar fell 0.2 percent.

The U.K. 10-year yield fell two basis points, or 0.02 percentage point, to 2.75 percent. The 2.25 percent bond due in September 2023 rose 0.165, or 1.65 pounds per 1,000-pound face amount, to 95.89. The yield still climbed eight basis points this week.

Gilts returned 2 percent in 2014 through yesterday, according to Bloomberg World Bond Indexes. Treasuries gained 1.4 percent and German securities earned 2 percent.

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