Pound Falls After U.K. Manufacturing Contracts

The pound slid against the dollar and the euro and bonds rose after a government report showed U.K. manufacturing contracted more than predicted in May, deepening concern the economy will tip into a recession.

The U.K. currency slipped to its lowest level versus the dollar in almost two weeks as investors scaled back bets the Bank of England will boost interest rates when it meets July 10. The Office for National Statistics said today output slid 0.5 percent in May from a month earlier. The median forecast of 22 economists surveyed by Bloomberg predicted no change. Two-year gilts rose to the highest level in more than a month.

The pound dropped as much as 0.9 percent to $1.9649, the weakest level since June 24, and was at $1.9660 as of 1:29 p.m. in London. It fell 0.5 percent against the euro to 79.59 pence, from 79.23 on July 4.

The pound dropped against 14 of the 16 most-actively traded currencies as the government agency said its index of manufacturing production fell to 102.7, the lowest level since September, adding to evidence an economic slowdown, sparked by the demise of a decade-long rally in house prices, is deepening.

The pound declined last week as an industry report showed services contracted by the most since 2001 and the Bank of England said commercial lenders will likely curb lending further in the third quarter. Overall industrial production, including manufacturing, utilities, mining and oil and gas output, fell 1.6 percent on the year, today's report showed.

Traders are betting slowing growth will prompt U.K. policy makers to keep borrowing costs unchanged, putting aside concern that inflation, already at the highest in at least 11 years, will accelerate. Consumer-price growth, which reached 3.3 percent in May, may top 4 percent by the end of 2008, central bank Governor Mervyn King said June 26.

Pound Falls After U.K. Manufacturing Contracts

TradingEconomics.com, Bloomberg
7/7/2008 6:30:50 AM