U.K. Pound Declines Against Dollar and Euro After BOE Minutes

By Lukanyo Mnyanda and Andrew MacAskill

Aug. 20 (Bloomberg) -- The U.K. pound fell against the dollar, trading near a two-year low, as the minutes of the Bank of England's last policy meeting showed policy makers judged inflation risks ``probably eased a little'' in the past month.

The currency also dropped for a third day versus the euro as the minutes of the Monetary Policy Committee showed seven policy makers, including Governor Mervyn King, voted to keep borrowing costs unchanged on Aug. 7. Timothy Besley backed an increase, while David Blanchflower favored a reduction. An industry report showed factory orders fell to the lowest level in five months.

``This will keep sterling on the defensive,'' said Daragh Maher, deputy head of global currency strategy at Calyon, the investment-banking unit of Credit Agricole SA. ``They were trying to send a dovish signal to the market and the indications are this is likely to continue in the months to come.''

The pound fell 0.5 percent to $1.8579 by 4:22 p.m. in London, from $1.8670 yesterday. It slipped to $1.8512 Aug. 15, the lowest since July 2006, and may drop to $1.83 in a month, Maher said. The pound was at 79.15 pence per euro, from 79.14.

The U.K. currency declined yesterday after policy maker Besley wrote in the Sun newspaper that increases in food and energy prices will slow, allowing inflation to ease toward the central bank's 2 percent ceiling by the end of 2009.

``The outlook for activity growth had continued to worsen,'' the minutes of the meeting published today showed. Policy makers also said ``some measures of inflation expectations had fallen back in July.'' King said last week there was ``a feeling of chill in the economic air.''

Deteriorating Data

Policy makers' comments continue ``to tell the story that the data outlook is deteriorating,'' said Jeremy Stretch, a senior strategist in London at Rabobank International, the third- largest Dutch bank. ``The prospect for rate cuts are still there.'' The pound may hold at current levels and trade at $1.86 in a month, Stretch predicted.

The Confederation of British Industry said its measure of factory orders was minus 13 in August, compared with minus 8 in July, matching the lowest level since October 2006 and adding to evidence the economy may be headed for recession. A gauge of output-growth expectations fell to minus 13, the lowest since December 2001, from minus 7, the survey showed.

The CBI, the nation's biggest business lobby, polled 603 manufacturers between July 25 and Aug. 13.

Falling House Prices

The pound lost 3 percent against the dollar last week, its biggest five-day drop since the period through July 1, 2005, as traders bet falling house prices will exacerbate the economic slowdown. The central bank kept its benchmark rate at 5 percent this month.

Gilts rose, with the yield on the 10-year bond dropping 3 basis points to 4.56 percent. The 5 percent security due March 2018 gained 0.23, or 2.3 pounds per 1,000-pound face amount, to 103.37. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, dropped 1 basis point to 4.55 percent. Bond yields move inversely to prices.

The spread between U.K. government bonds and their German counterparts has narrowed as traders bet the end of a decade-long rally in the nation's housing market will persuade policy makers to cut interest rates. The 10-year gilt yielded 43 basis points more than the German bund, down from 69 basis points on Feb. 25, the widest this year.

U.K. bonds have outperformed their European counterparts in the past three months as evidence the economic slowdown is deepening prompted investors to remove wagers on rate increases. The implied yield on the March short-sterling futures contract was at 5.16 percent, from 5.44 percent at the end of July.

The nation's bonds have returned 2.4 percent in the past three months, compared with 1.2 percent from their European counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and U.K. Gilts Master indexes.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net