Pound Weakens as Consumer Confidence Slumps, Services Contract

By Matthew Brown

Dec. 3 (Bloomberg) -- The pound weakened after reports showed U.K. services shrank at the fastest pace in at least 12 years and consumer confidence worsened, giving the Bank of England more reason to cut interest rates tomorrow.

The British currency declined against all 16 of the major currencies tracked by Bloomberg, losing as much as 1.7 percent against the dollar and 1 percent versus the euro. An index based on a survey of about 700 service companies fell to 40.1, the lowest since the gauge began in 1996, Markit and the Chartered Institute of Purchasing and Supply said today. Nationwide Building Society said consumer confidence slipped to the lowest level since at least 2004.

The reports “weren’t taken too well by the markets,” said Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong at Calyon, the investment-banking unit of France’s Credit Agricole SA. “There are big expectations the central bank’s going to remain pretty aggressive. The market will be disappointed if it’s anything less than 100 basis points.”

The pound dropped to $1.4778 by 2:40 p.m. in London, from $1.4920 yesterday. It was at 85.57 pence per euro from 85.23 pence.

The pound slipped 26 percent against the dollar this year, the most since at least 1972, as the Bank of England lowered its key rate four times to fend off the worst of the fallout from the global credit crisis. The economy shrank 0.5 percent in the third quarter, after showing zero growth in the second.

Buiter Comments

Former U.K. policy maker Willem Buiter said yesterday the central bank may reduce the benchmark rate to zero early next year. The Bank of England will cut the rate by 1 percentage point to 2 percent tomorrow, according to the median forecast of 60 analysts surveyed by Bloomberg.

Buiter’s views “appear to have stimulated the imagination of the market,” Greg Gibbs, director of foreign-exchange strategy at ABN Amro Holding NV in Sydney, wrote in a note to clients today.

Interest-rate futures slid as traders increased wagers on cuts in borrowing costs. The yield on the contract expiring in March declined five basis points to 2.22 percent.

U.K. government bonds gained, keeping yields near record lows. The yield on the 10-year bond fell five basis points to 3.43 percent, four basis points off the least since 1989, when Bloomberg began collating data. The two-year gilt yield dropped five basis points to 1.70 percent. Yields move inversely to bond prices.

Falling Yields

The yield on the two-year note, which is more sensitive to interest-rate movements, declined 276 basis points, or 2.76 percentage points, since the collapse of Lehman Brothers Holdings Inc. on Sept. 15. That compares with a 224 basis-point decline in the yield on the two-year U.S. Treasury note.

Federal Reserve Chairman Ben S. Bernanke said Dec. 1 the central bank may buy Treasury securities to revive the economy because his room to lower the main U.S. rate from the current 1 percent is “obviously limited.”

“Bernanke’s comments the other day kicked off the rally and that’s bringing gilts with it,” Elisabeth Afseth, a fixed-income analyst in London at broker Evolution Securities Ltd., said in a telephone interview. “We have the central bank announcement tomorrow, so that should keep it going. There’s no reason yields can’t go a bit lower still.”

The cost of hedging against losses on gilts rose to a record in the market for credit-default swaps today.

Five-year contracts on U.K. government debt climbed 1.5 basis points to 109, according to CMA Datavision prices. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates a deterioration in the perception of credit quality; a decline, the opposite.

To contact the reporters on this story: Matthew Brown in London on mbrown42@bloomberg.net