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Sun 25 Sep 2011 10:36 AM

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Pound slides versus dollar on concern over economy

Sterling slumped as cenbank officials said they may need to buy more bonds to cap borrowing costs

Pound slides versus dollar on concern over economy
The pound has gained 1.1 percent in the past three months

The pound fell for a fifth consecutive week versus the dollar, its longest losing streak in more than a year, amid speculation the Bank of England will respond to slowing global economic growth.

Sterling slumped to its lowest level against the dollar in more than a year as central bank policy makers said on Sept 21 they may need to buy more bonds to keep borrowing costs capped as the economic recovery falters. The British currency fell to an all-time low versus the yen. The International Monetary Fund cut its 2011 and 2012 UK economic growth forecasts this week to 1.1 percent and 1.6 percent. The Washington-based IMF previously projected expansion of 1.5 percent and 2.3 percent respectively.

Sterling’s weakness “is all about dollar demand,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “When the market feels this tense, people want liquidity, and the dollar is still the most liquid currency. The Bank of England minutes and the IMF downgrade added an extra layer of negative pressure on the pound.”

The pound weakened 2.1 percent this week to $1.5458 at 4:51 p.m. in London yesterday. That’s its steepest weekly drop since November 2010. The UK currency depreciated 2.7 percent to 117.96 yen, after falling to a record low 116.84 yen on Sept 22. Sterling was little changed versus the euro at 87.42 pence, from 87.41 pence on Sept 16.

The pound has gained 1.1 percent in the past three months, paring a 12-month decline to 4.4 percent, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Currency Indexes.

Most of the Bank of England’s nine-member Monetary Policy Committee said an expansion of the 200 billion-pound bond- purchase program was “increasingly probable,” minutes of their September meeting showed. The committee voted 8-1 to maintain the current size of the plan and was unanimous in keeping the benchmark interest rate at a record low 0.5 percent.

The Federal Reserve signaled “significant downside risks” in the US economy. The US central bank said Sept 21 it will extend the average maturities of bonds in its portfolio by purchasing $400 billion of long-term debt and selling an equal amount of shorter-term securities to push down yields on longer- dated Treasuries.

Gilts advanced, pushing 10-year yields down 11 basis points this week to 2.37 percent. The two-year yield was little changed at 0.53 percent. The rate dropped to a record 0.477 percent on Sept 22, the lowest since Bloomberg began collecting data on the securities in 1992. The 30-year gilt yield fell to a record low 3.449 percent yesterday.

“The market was surprised by the Fed’s downbeat assessment of the economy,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The move in the yield curve is led by the Fed, because of the relationship between long-dated gilt yields and Treasury yields.”

The UK Debt Management Office said on Sept 21 it plans to sell 3.75 percent bonds maturing in July 2052 through banks next week, subject to market conditions.

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