Pound Advances as IMF Raises U.K. Growth Forecast

Bloomberg – 6 October 2009

The pound advanced against the euro for the third time in four days as the International Monetary Fund raised the U.K.’s economic growth forecast for 2010.

The British currency was little changed against the dollar, paring earlier declines, after the IMF said gross domestic product will expand 0.9 percent next year, from a July prediction of 0.2 percent, as the housing-market slump eases and exports increase. Sterling’s gains versus the euro were buoyed after European Central Bank President Jean-Claude Trichet said foreign-exchange moves were having “adverse” effects, signaling concern about the strength of the single currency.

“There has been an upswing in the economic data, pointing to the U.K. going from being a laggard in the global recovery to closing the gap with the others,” said Jane Foley, a research director in London at Forex.com, an online currency trader.

The pound weakened to its lowest level in six months versus the euro and fell to less than $1.60 for the first time since July after the Newcastle Journal cited Bank of England Governor Mervyn King on Sept. 24 as saying the pound’s decline is “helpful” for the process of rebalancing the British economy, The U.K. trade deficit narrowed to 2.5 billion pounds in July, from 4 billion pounds in November 2007, when the pound reached a 26-year high against the dollar.

King ‘Misinterpreted’

“Sterling has fallen too far,” said Geoffrey Yu, a currency strategist at UBS AG in London. “King’s comments were misinterpreted so once people realized that, the pound was due to correct.”

The pound dropped 6.9 percent against the euro in the third quarter and 2.9 percent against the dollar as the Bank of England increased its so-called quantitative-easing policy to help haul the economy out of its recession. Sterling gained more than 12 percent versus the currencies in the first half.

The currency pared its gains against the euro today and declined versus the dollar after the Chartered Institute for Purchasing and Supply and Markit Economics said an index of manufacturing activity fell to 49.5 in September. The median forecast of 26 economists surveyed by Bloomberg was for a reading of 50.2. A number below 50 indicates a contraction.

“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” Trichet said today at a press conference after a meeting of euro-area finance ministers in Gothenburg, Sweden.