Pound Falls to 7-Week Low Versus Dollar on Signs Growth Slowing

By Kim-Mai Cutler

Aug. 5 (Bloomberg) -- The pound declined to the lowest level in seven weeks against the dollar as U.K. factory production unexpectedly shrank for a fourth month in June.

Britain's currency slipped most against the yen as traders added to bets the Bank of England will leave interest rates unchanged this year. The pound also dropped for a third day versus the dollar after a separate report showed the country's services industries contracted in July.

``Sterling is the last man standing,'' said Paul Robson, a London-based currency strategist at the Royal Bank of Scotland Group Plc. ``With other central banks already cutting rates, people are going to think the Bank of England is next.''

The pound slid to as low as $1.9525, the weakest level since June 18, and was at $1.9552 by 2 p.m. in London, from $1.9623 yesterday. It climbed to 79.18 pence per euro, from 79.41 pence.

Against the yen, the pound slipped as much as 0.9 percent to 210.60, the lowest level since July 17, from 212.46 yesterday

Factory output fell 0.5 percent from May and was 1.3 percent lower than a year earlier, the Office for National Statistics said today. Economists forecast a gain of 0.1 percent on the month, according to the median of 30 estimates in a Bloomberg News survey.

An index based on replies on sales and business conditions from about 700 service companies rose to 47.4, from 47.1 in June, according to The Chartered Institute of Purchasing and Supply. A reading below 50 shows contraction.

Traders pared bets on an interest-rate increase this year, with the implied yield on the March short-sterling futures contract dropping 2 basis points to 5.38 percent. The nation's benchmark rate is 5 percent.

Recession Threat

Policy makers kept borrowing costs on hold at their July 10 meeting after lowering them three times since November in a bid to stave off a recession in the face of accelerating inflation. They will keep it on hold again on Aug. 7, according to all 60 economists surveyed by Bloomberg.

U.K. 10-year government bonds rose for a second day, with the yield falling 5 basis points to 4.76 percent. The 5 percent security due March 2018 rose 0.42, or 4.2 pounds per 1,000-pound ($1,957) face amount, to 101.83. The yield on the two-year note slipped 6 basis points to 4.72 percent. Bond yields move inversely to prices.

The pound will weaken to $1.90 and to 80 pence per euro by year-end, according to the median forecast of analysts and strategists surveyed by Bloomberg. The 10-year note yield will end the year at 4.87 percent, according to a separate survey.

The pound fell 7.4 percent against the euro this year. It has declined 1.4 percent versus the dollar.

The U.K. today sold 2.25 billion pounds of 4.75 percent notes due in 2030. They yielded an average 4.841 percent, and demand for the securities was 1.58 times higher than the amount offered, up from 1.41 times at the last auction on March 13.

``The result was average, pointing to at best modest appetite for the issue,'' said Richard McGuire, a senior fixed- income strategist in London at RBC Capital Markets. ``We didn't expect a hugely successful result as the market has struggled to take in supply in the U.K.''

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net.