U.K. Pound Falls as Stocks Tumble, Traders Add to Rate-Cut Bets

By Anchalee Worrachate

Dec. 2 (Bloomberg) -- The U.K. pound declined against the euro for a second day as stocks fell and traders raised bets the Bank of England will cut interest rates this week to prevent the economy from sinking deeper into a recession.

The British currency also weakened versus the yen and Swiss franc as stocks in Asia plunged. Policy makers will lower the U.K.’s key interest rate by 1 percentage point to 2 percent this week to revive the economy, according to the median of 60 economist forecasts in a Bloomberg survey.

“You only have to look at what happens to equity markets to understand what’s going on with the pound,” said Neil Mellor, a London-based currency strategist at Bank of New York Mellon Corp., a custodian of $23 trillion of financial assets. “It’s all about risk aversion. Sterling is trending lower, and growing doubts about whether radical rate cuts by the central bank will revive the economy didn’t help.”

The pound weakened to 84.81 pence per euro as of 7:09 a.m. in London, from 84.67 pence yesterday. It was little changed at $1.4880, from $1.4884. The next key support point for the pound, a level where orders to buy the currency may be clustered, is $1.4545, according to Robin Wilkin, head of currency and commodity technical strategy at JPMorgan Chase Bank in London.

Britain’s currency posted its biggest one-day loss against the U.S. currency in more than a month yesterday as the FTSE 100 Index tumbled 5.2 percent and data showed the slump in housing and manufacturing is deepening.

Interest-Rate Futures

The yield on the December short-sterling futures contract slid yesterday as speculation increased the Bank of England, led by Governor Mervyn King, will reduce the benchmark interest rate Dec. 4. The yield dropped 17 basis points to 3.14 percent.

Futures traders increased bets the pound will fall against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed last week. The difference in the number of wagers by hedge funds and other large speculators on a drop of the pound compared with those on the gain -- so-called net shorts -- rose to 42,431 on Nov. 18, from 39,838 a week earlier.

U.K. government bonds rose yesterday, driving the yield on the two-year note down 17 basis points to 2 percent, the lowest level in five days. The 4.75 percent security due in June 2010 advanced 0.25, or 2.5 pounds per 1,000-pound ($1,487) face amount, to 104.04. The yield on the 10-year gilt fell 11 basis points to 3.65 percent. Yields move inversely to bond prices.

Gilts beat their European counterparts last month, handing investors a 4.6 percent return, compared with 4 percent on German bonds, according to Merrill Lynch & Co.’s U.K. Gilts and German Federal Governments indexes.

The London-based Debt Management Office, which acts on behalf of the U.K. Treasury, is scheduled to sell today 2.25 billion pounds of 4.25 percent bonds maturing in 2049.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net