Thursday, 6 August 2009

2nd UPDATE: Pound Plunges As BOE Expands Asset Purchases

2nd UPDATE: Pound Plunges As BOE Expands Asset Purchases

(Adds further comments.)

LONDON (Dow Jones)--The pound has fallen sharply after the Bank of England announced Thursday that it intends to expand its bond-buying program by GBP50 billion.

Sterling has dipped by over 0.8% to hit a low of $1.6833 against the dollar, while the euro jumped by nearly 1% against the pound to hit GBP0.8547.

Economists had been split in their predictions on what the BOE was likely to decide at its policy meeting this month. However, a run of surprisingly positive U.K. data Wednesday had encouraged some economists to expect that the BOE might suspend or trim back its bond purchases.

Now it appears that growing optimism about the U.K.'s economic outlook may have been misplaced.

"The U.K. still has a long way to go, and that's what the bank is reacting to," said Geoffrey Kendrick, a currencies analyst at UBS in London.

Kendrick said that the U.K.'s unexpectedly weak reading of gross domestic product for the second quarter should have been a reminder that the economic outlook was precarious. GDP shrank by 0.8% in the second quarter and dropped 5.6% on the year, the largest annual decline since quarterly records began in 1955.

"The market got ahead of itself back in June, with the pound supported by its correlation with global banking stocks," he said.

It remains to be seen whether the pound's shift lower Thursday will prove to be a knee-jerk reaction or the start of a sustained move lower.

Some sterling bulls remained unfazed. French bank Calyon, which has long predicted that the pound will end the year at $1.75, said the slip in the pound should be viewed as a neat opportunity to buy.

"The central bank has again shown a willingness to act to ensure the recovery can gain traction and get inflation back on target in the medium term. This, in turn, should make the market more, not less, confident about recovery and ultimately drive sterling higher," said Daragh Maher, a senior currencies analyst at Calyon in London.

"The BOE has simply provided a better level to start buying sterling afresh," he added.

At 1215 GMT, the pound had regained a little stability. It was trading at $1.6852. The euro was at GBP0.8528.

-By Katie Martin, Dow Jones Newswires; +44 (0) 207 842 9346; katie.martin@dowjones.com

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CURRENCIES: Euro And Pound Fall After Policy Announcements


CURRENCIES: Euro And Pound Fall After Policy Announcements

By William L. Watts

The euro and the British pound fell versus the U.S. dollar on Thursday after both the Bank of England and the European Central Bank kept interest rates unchanged.

The British currency dropped after the BoE boosted its quantitative-easing program by an unexpectedly large 50 billion pounds ($84 billion) Thursday, signaling that worries about the fragility of the economic outlook continue to dominate the monetary-policy-making process.

Policy makers "surprised the market by extending its asset-purchase plan' by that much and for three months, said analysts at Brown Brothers Harriman. "This drove sterling sharply lower."

The BOE also left its key rate unchanged at 0.5%.

The British pound fell to $1.6868, from $1.6968 before the announcement and from $1.7020 in late North American trading on Wednesday.

Also Thursday, the European Central Bank left its key lending rate unchanged at a historic low of 1%, as expected. ECB President Jean-Claude Trichet's monthly news conference is scheduled to begin at 8:30 a.m. Eastern.

The euro bought $1.4373, down from $1.4432 Wednesday.

Many analysts had pointed to signs that the British economy could pull out of recession by year's end to justify expectations that the central bank would put its 125-billion-pound ($211 billion) asset-purchase program on hold

The dollar index (DXY), which tracks the U.S. unit against a trade-weighted basket of six major currencies, rose to 77.881, from 77.515 late Wednesday.

One dollar bought 95.61 Japanese yen, up from 94.99 yen late Wednesday.

Looking further ahead, investors were awaiting the U.S. government's monthly report on nonfarm payrolls for July, due out Friday. Economists surveyed by MarketWatch expect a loss of 275,000 jobs, which would be the fewest jobs lost since August.

"Investors should stay cautious" ahead of Friday's U.S. non-farm payrolls report for July, wrote strategists at UniCredit MIB in Milan.

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=lwy%2FldcGHKHpqaunEKCa2g%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

August 06, 2009 08:26 ET (12:26 GMT)

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