Pound Drops to Four-Month Low Versus Euro as Unemployment Rises

By Morwenna Coniam and Gavin Finch

Sept. 16 (Bloomberg) -- The pound fell to a four-month low against the euro for a second day as U.K unemployment rose to the highest level since 1995, denting optimism that an economic recovery is taking root.

The British currency also held near the lowest level in a week against the dollar after the Office for National Statistics said the number of people seeking jobs in the three months through July rose by 210,000 to 2.47 million. The pound tumbled yesterday after Bank of England Governor Mervyn King signaled it may cut the rate paid to hold reserves at the central bank.

“The market had a shock yesterday and the data this morning was not strong enough to reverse the trend,” said Vincent Chaigneau, head of currency and interest-rate strategy at Societe Generale SA in London. “The data confirmed what King said yesterday, which is that we can pretty much rule out a strong recovery. It was a wake-up call for the market.”

The pound was little changed at 88.87 pence per euro as of 12:52 p.m. in London, after weakening as much as 0.5 percent to 89.31 pence, the lowest level since May 15. It climbed 0.1 percent to $1.6508.

The unemployment rate in the three months through July rose to 7.9 percent, the most since 1996, the statistics office said. That compares with the latest figures of 9.5 percent in the euro region, 9.7 percent in the U.S. and 5.7 percent in Japan.

Deposit Rate

King told lawmakers in London yesterday that the central bank is “looking at” cutting the deposit rate to stimulate lending by financial institutions and revive consumer demand. The bank’s next Monetary Policy Committee decision is on Oct. 8.

Banks are currently paid 0.5 percent on the deposits. While the central bank is boosting its reserves through asset purchases under its so-called quantitative-easing program, King said he doesn’t want them to grow too much.

The yield on the two-year gilt dropped 3 basis points to 0.72 percent, and fell to 0.71 percent earlier, the lowest level since at least January 1992. The yield on the 10-year bond dropped 3 basis points to 3.61 percent. The difference in yield, or spread, between the two securities widened to 288 basis points, near the most since at least January 1992.

To contact the reporters on this story: Morwenna Coniam in London at mconiam@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net