The pound weakened against the euro for a second day after a report showed an index of U.K. manufacturing fell more than economists forecast in September.
The British currency slid to the lowest in more than two weeks against the dollar. Gilts declined after Fitch Ratings said Sept. 28 that U.K. government debt as a percentage of gross domestic product will peak at a higher level and later than it previously predicted. Sterling pared the biggest two-week advance against the 17-nation euro since July, having appreciated amid concern the debt crisis was deepening in Spain.
“With little else to focus on today, domestic considerations may come back to the forefront,” said Audrey Childe-Freeman, head foreign-exchange strategist at Bank of Montreal in London. “In cable, the recent weakness is a risk- off, euro-driven story,” she said, referring to the pound- dollar exchange rate.
Sterling fell 0.4 percent to 79.87 pence per euro at 12:41 p.m. London time. It appreciated to 79.24 pence on Sept. 27, the strongest since Sept. 6 and has risen 1.8 percent in the two weeks ended Sept. 28. The pound declined 0.2 percent to $1.6138, after reaching $1.6109, the lowest since Sept. 13.
Childe-Freeman forecasts the pound will strengthen to $1.65 in the next three months.
Factory Output
A gauge of factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 48.4 last month from a revised 49.6 in August. The median forecast of 29 economists in a Bloomberg News survey called for a reading of 49.
A similar report on the construction industry tomorrow will show a second month of contraction, according to a separate survey.
The pound has gained 1.6 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 3.2 percent and the dollar slid 2.6 percent.
Fitch affirmed Britain’s AAA level on Sept. 28 and kept the nation on negative outlook, adding that it doesn’t expect to decide on whether it will change the top grade until 2014.
“The negative outlook reflects the very limited fiscal space, at the AAA level, to absorb further adverse economic shocks in light of the U.K.’s elevated debt levels and uncertain growth outlook,” Fitch said in a statement.
Foreign Holdings
The 10-year gilt yield rose less than one basis point, or 0.01 percentage point, to 1.74 percent. The 1.75 percent bond due in September 2022 fell 0.065, or 65 pence per 1,000-pound face amount, to 100.14. The two-year yield was little changed at 0.20 percent.
The U.K. is scheduled to auction as much as 3.5 billion pounds of the September 2022 securities tomorrow.
Foreign investors increased their holdings of U.K. government bonds for a second month in August, according to Bank of England data. Non-residents bought 5.6 billion pounds more gilts than they sold in August, after raising their holdings by 9.36 billion pounds in July, the data published today showed.
Overseas investors held 380.3 billion pounds of gilts as of the end of the March, accounting for about 31 percent of total outstanding government securities, according to a separate report from the Debt Management Office.
Gilts returned 3.2 percent this year through Sept. 28, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.3 percent and U.S. Treasuries earned 2.3 percent.
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