Economic Calendar

Tuesday, January 26, 2010

Pound Drops Versus Dollar, Euro as GDP Falls Short of Estimates

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By Matthew Brown

Jan. 26 (Bloomberg) -- The pound fell against the dollar and the euro and gilts rose after a report showed the U.K. economy grew less than forecast in the fourth quarter, even as it exited its longest recession on record.

Sterling weakened from within half a penny of the strongest level against the 16-nation currency in five months. Gross domestic product expanded 0.1 percent in the final three months of 2009 after contracting 0.2 percent in the third quarter, the Office for National Statistics said today. The U.K. faces a “fragile” recovery as the government addresses the record budget deficit, Confederation of British Industry director general Richard Lambert said yesterday.

“Growth is slow and inflation is rising, and weakness of the exchange rate has to happen,” said Hans-Guenter Redeker, head of foreign-exchange strategy in London at BNP Paribas SA. “We are massively bearish on the pound.”

The pound depreciated 0.3 percent to 87.34 pence per euro as of 10:13 a.m. in London. It strengthened to 86.51 pence on Jan. 20, the strongest level since Aug. 21. The British currency dropped 0.7 percent to $1.6127.

Economists predicted a 0.4 percent increase in fourth- quarter U.K. GDP, according to a Bloomberg survey. The lowest forecast was for 0.2 percent growth.

Government bonds rose, sending the yield on the 10-year gilt down 4 basis points to 3.87 percent. The 4.5 percent security due March 2019 rose 0.27, or 2.7 pounds per 1,000-pound face amount, to 104.76. The two-year note yield declined 3 basis points to 1.20 percent.

U.K. government bonds returned 0.7 percent this year, compared with 1.2 percent for German bunds and 1.4 percent for U.S. Treasuries, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

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




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