Sterling Succumbs to Dollar Strength Dropping Below $1.60Eshe Nelson
The pound tumbled below $1.60 for the first time since November, sapped by signs growth in the U.K. is losing momentum as the U.S. economy gathers strength.
An eight-day run of losses, the longest stretch since July, has hauled the British currency down 2.6 percent versus its American counterpart. It’s now more than 7 percent below this year’s high of $1.7192, a rate set in July that was the strongest level since 2008.
Fueling the declines today were reports showing growth in U.K. services is decelerating at a faster pace than economists estimated, while a surge in hiring across the Atlantic sent unemployment to a six-year low. The data added to evidence that the U.S. may be better able to withstand an increase in interest rates earlier than Britain.
“The dollar is performing well across the board after the nonfarm payrolls data and pound-dollar is lower as a consequence,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “Data divergence is behind the pound-dollar move. The market will be revising interest-rate increases. Some expectation may result in forecasts for a Federal Reserve rate hike prior to a Bank of England hike.”
The pound declined 1.1 percent to $1.5965 at 4:15 p.m. London time, the biggest drop since Sept. 8. It touched $1.5952, the weakest level since November. The U.K. currency strengthened 0.1 percent to 78.38 pence per euro.
Traders have been pushing back bets on when the Bank of England will raise borrowing costs from a record low at the same time as speculation mounts that the Fed is moving closer to an increase in interest rates. Foreign-exchange dealers tend to favor currencies of countries where interest rates are rising as deposits or investments will earn a higher return.
In the U.K., forward contracts based on the sterling overnight interbank average, or Sonia, show investors are speculating the Bank of England won’t raise rates by 25 basis points until June. As recently as August they were betting on February.
Traders see a 77 percent chance the Fed will raise rates by September, up from a 69 percent chance three months ago.
While sterling is falling against the dollar, it set a two-year high against the euro this week on relatively weaker growth in the 18 nations that share the currency. The pound rounded out a sixth-straight month of gains through Sept. 30.
Markit Economics’s Purchasing Managers’ Index for U.K. services fell to 58.7 from a 10-month high of 60.5 in August, today’s report showed. Economists had forecast a decline to 59, based on the median estimate in a Bloomberg News survey. Markit said the gauge, along with its factory and construction surveys, indicates the economy grew 0.8 percent in the third quarter, down from 0.9 percent in the second.
U.S. employers added 248,000 jobs in September, from an upwardly revised 180,000 the previous month, the Labor Department said today. That’s more than the 215,000 median forecast of economists surveyed by Bloomberg. The unemployment rate fell to a six-year low of 5.9 percent.
Britain’s government bonds fell for the first time in five days. Gilts declined before the U.K. debt office is scheduled to sell 2.25 billion pounds in bonds due in 2045 next week. Ten-year benchmark securities were still higher on the week as funds sought to align holdings with indexes they track for the end of the month.
“We’ve had some short-term factors that have aided the gilt market with light supply and index month-end events,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Now we are going through a reassessment of the fact supply returns, long-end issuance next week, last week of buybacks, the issuance schedule picks up into the end of the year and that feeds through into valuations.”
The 10-year gilt yield rose seven basis points, or 0.07 percentage point, to 2.40 percent. That’s down from 2.47 percent at the end of last week. The price of the 2.75 percent bond due in September 2024 fell 0.645, or 6.45 pounds per 1,000-pound face value, today to 103.105.
The U.S. five-year yield rose above that on similar-maturity gilts this week, an additional sign investors were betting on relatively higher interest rates in America.
Gilts returned 8.3 percent this year through yesterday, Bloomberg World Bond Indexes show. Treasuries gained 4.2 percent and German securities earned 7.6 percent.