Pound Drops as Home Sellers Lower Asking Prices Most This Year

Aug. 17 (Bloomberg) -- The pound fell the most in more than two months against the dollar after a report showed U.K. home sellers lowered asking prices in August by the biggest amount this year, signaling the recession may have some way to run.

The British currency also slid the most in a month against the Japanese yen as Rightmove Plc, the owner of the U.K.’s largest residential property Web site, said the average cost of a home fell 2.2 percent in August after gaining 0.6 percent in July. Stocks around the world dropped after a report showing Japan’s economy grew less than economists estimated prompted investors to shun higher-yielding currencies.

“The latest house-price news is adding to the negative outlook for sterling this week,” said Ian Stannard, a foreign- exchange strategist in London at BNP Paribas SA, France’s largest bank. “Risk appetite is going into reverse, hitting all the pro-cyclical currencies, but mostly the pound.”

The pound fell as much as 1.6 percent to $1.6276, the biggest drop since June 3, before trading at $1.6333 as of 6:10 p.m. in London. It weakened 0.4 percent to 86.19 pence per euro and 1.9 percent to 154.14 yen.

The pound’s biggest five-month rally in 24 years may be ending as the Bank of England floods the shrinking U.K. economy with newly printed cash and slowing inflation precludes higher interest rates to lure investors.

Rally Ending

The currency soared 23.5 percent from March 10 to Aug. 5 on speculation U.K. assets would rise as the worst financial crisis in six decades eased. The sharpest increase since 1985 ended Aug. 6 after policy makers said the recession was deeper than anticipated and moved to spur the economy by expanding its purchases of U.K. debt 40 percent to $290 billion. Six days later, central bank Governor Mervyn King said inflation will probably fall below the Bank of England’s target.

The pound slumped 2.6 percent since Aug. 5 to last week’s $1.6543 close. Only three of 176 currencies tracked by Bloomberg did worse. After the Bank of England decision, pound futures and options speculators became more pessimistic as weekly bets favoring sterling fell more than 32 percent, the most since November.

The British currency may rise to $1.75 this year as evidence grows that the global economic recovery is gathering strength and riskier assets rally, said Stephen Jen, a money manager at BlueGold Capital Management LLP.

The currency market “over-reacted to bad consumer confidence and retail sales data out of the U.S. last week,” said Jen, a former currency strategist at Morgan Stanley who now helps oversee about $1.1 billion at BlueGold. “At turning points in business cycles we see mixed data coupled with skeptical investors.”

Gilts Rise

U.K. two-year government notes rose for a sixth straight day, the longest streak of gains since the seven days ending April 30, pushing the yield down as much as 7 basis points to 0.86 percent, the lowest level since at least 1992, before trading down less than 1 basis point at 0.90 percent. The 4.25 percent security due March 2011 was priced at 105.17. The 10- year gilt yield fell 7 basis points to 3.60 percent, the lowest level since May 20 based on closing prices.

Gilts returned investors 2.5 percent this month, compared with a zero return on U.S. Treasuries and a 0.05 percent loss for German government bonds, according to Merrill Lynch & Co. indexes.

Gilts will keep rising as the U.K.’s struggling economy and the Bank of England’s bond-purchase program buoys demand, Carl B. Weinberg, chief economist at High Frequency in Valhalla, New York, wrote in a report today.

“With the BOE still buying gilts, and with the consumer price index tame for a few months -- and with the economy deeply depressed -- we expect the yield curve to flatten more as bond yields rally more than interest rates,” Weinberg said.

‘Deep Recession’

King said on Aug. 12 the world remains in “deep recession” and that banks may need to raise more capital to rebuild their balance sheets. Policy makers this month voted to add 50 billion pounds of newly printed money to its bond-buying program to ease Britain’s recovery.

The central bank bought 1.4 billion pounds of gilts maturing between 2025 and 2032 today, and plans to purchase the same amount again on Aug. 18 and Aug. 19, bringing the total to 130.8 billion pounds.

The U.K. will show economic growth again in the second half, Bank of England policy maker Andrew Sentance wrote in an article for the Sunday Times newspaper yesterday.

“I expect to see a return to growth in the second half of this year, as the U.K. economy responds to the stimulus from low interest rates, a competitive exchange rate, government tax and spending measures, an improving global economic environment and the Bank’s policy of quantitative easing,” the newspaper quoted him as saying.

The U.K.’s Debt Management Office will hold quarterly meetings today with investors and gilt-edged market makers, which are obliged to bid at U.K. government bond auctions, to discuss the issuance outlook for the fourth quarter. The results of the meetings will be announced at 9 a.m. in London tomorrow, according to the debt office’s Web site.