By Matthew Brown
June 15 (Bloomberg) -- The pound fell against the dollar for a second day after the Confederation of British Industry said the nation’s economy won’t grow until next year.
The pound also dropped versus the Japanese yen as the FTSE 100 Index of U.K. shares fell the most in more than three weeks and gilts rose as investors sought the safety of government bonds. The Bank of England may need to print more money to boost growth, the CBI said in forecasts published today. Gross domestic product will drop 0.3 percent in the second quarter and 0.1 percent in the third, before stalling in the final three months of the year, the biggest U.K. business lobby said.
“Sterling is seen as a global recovery story and markets are a little nervous about the recovery today,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “If stocks continue to fall and risk appetite is going to be under some pressure, then the pound will probably weaken somewhat against the dollar.”
The pound slid 0.8 percent to $1.6305 as of 4:34 p.m. in London. The British currency fell 1.4 percent to 159.65 yen. Against the euro, it strengthened 0.7 percent to 84.60 pence.
The FTSE 100 Index dropped 2.6 percent, the most since May 21, with the Dow Jones Stoxx 600 Index of European shares declining 2.4 percent. The FTSE 350 Banks Index, which has risen and fallen in line with the pound more than 79 percent of the time this year, retreated 3.3 percent.
Gilt Sale
The yield on the 10-year gilt declined nine basis points to 3.88 percent. The 4.5 percent security due March 2019 rose 0.78, or 7.8 pounds per 1,000-pound face amount, to 104.98. The two- year note yield fell nine basis points to 1.38 percent, the biggest decline in yield in more than a month. Bond yields move inversely to prices.
Britain plans to sell as much as 5 billion pounds of bonds through banks tomorrow, according to the U.K. Debt Management Office.
The “indicative range being talked about is 3 to 5 billion pounds,” Steve Whiting, a spokesman for the debt agency in London, said today. The debt office hired Barclays Plc, Goldman Sachs Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc to offer the 4.50 percent gilt maturing in September 2034, it said on June 9.
The U.K.’s first so-called syndication since 2005 comes as the Treasury aims to raise 220 billion pounds this year to finance an expanding budget deficit. Darling said on April 22 the budget shortfall in the year through March 2010 will reach 12.4 percent of gross domestic product, the most among the Group of 20 nations.
Economic Forecasts
“We still have some way to go before the U.K. economy is truly out of the woods,” Ian McCafferty, the CBI’s chief economic adviser, told reporters.
The CBI’s predictions are more pessimistic than those of other economists. Royal Bank of Scotland Group Plc economist Ross Walker said on June 12 that the economy will start growing as soon as the third quarter.
Bank of England policy maker Andrew Sentance said last week that the recession may be “bottoming out.”
The Bank of England bought 3.5 billion pounds of gilts through a reverse auction today as part of its quantitative- easing program, designed to hold down borrowing costs and stave off deflation. The bank has purchased 86.9 billion pounds of a planned 125 billion pounds of U.K. debt.
“Last week’s enthusiasm that the U.K. may be in the early stages of its recovery continues to lift the pound, although the CBI’s forecasts that recovery will not be seen until the first quarter of 2010 have dampened these hopes this morning,” said Jane Foley, research director at Forex.com, an online currency trader. “This week’s unemployment and public sector net borrowing data could test the pound’s current bull run.”
The pound will rise to $1.85 by year-end as the U.S. currency is weighed down by the fiscal and current account deficits and Federal Reserve debt purchases, JPMorgan Chase & Co. said in a note June 12, revising a previous forecast of $1.58.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
Last Updated: June 15, 2009 12:43 EDT