Pound Weakens Second Day Versus Euro Amid Optimism Over Italy, Greek Plans

By Lucy Meakin - Nov 11, 2011 8:54 PM GMT+0700

The pound weakened for the second day versus the euro amid optimism European officials are taking steps to address the region’s debt crisis.

Sterling declined against the dollar as data showed U.K. factory output prices were unchanged in October as costs for chemicals, pharmaceuticals and electrical equipment dropped. Italy’s Senate voted for debt-reduction measures in an attempt to boost investor confidence while Greece will swear in a new unity government, led by former European Central Bank vice president Lucas Papademos. European stocks rose.

“The U.K. has been deemed somewhat as a safe haven within Europe,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “We’re slightly more stable in euroland again. What we’ve seen this morning is the euro rallying quite sharply against the pound. That’s causing the pound to be weak across the board because of the buying of the euro against the pound.”

The pound weakened 0.3 percent to 85.69 pence per euro, extending yesterday’s 0.4 percent decline and bound for a 0.4 percent weekly advance. Sterling was little changed at $1.5942, on course to match last week’s 0.6 percent drop. The British currency slid 0.4 percent to 123.25 yen.

It was lower against all but one of 16 major peers tracked by Bloomberg, while the Stoxx Europe 600 Index climbed 1.1 percent and the U.K.’s FTSE 100 Index (UKX) rose 0.9 percent.

Manufacturing Prices

The cost of goods at U.K. factory gates was flat on the month and the annual rate of manufacturing inflation eased to 5.7 percent from 6.3 percent in September, according to data today. That’s the slowest annual pace since May. Separate data showed construction output fell 0.2 percent in the third quarter, which compares with a drop of 0.6 estimated in gross domestic product data.

The pound has appreciated 1.4 percent in the past month, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

U.K. benchmark government bonds fell, with the 10-year gilt yield three basis points higher at 2.26 percent. The 3.75 percent security due September 2021 declined 0.310, 3.10 pounds per 1,000 pound face amount to 113.035. Two-year notes yielded 0.53 percent.

Gilts have returned 14 percent this year, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. German bunds rose 8.9 percent, while Italian securities lost 9.3 percent.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.