Sterling struggles as gilt yields hit record lows

LONDON: A fall in returns on UK government debt to the lowest on record knocked half a percent off sterling's value against the euro on Wednesday while a recovery against a broadly weaker US dollar stalled around $1.30.

After a week in which sterling has suffered from the Bank of England's aggressive moves to ease monetary policy and a volley of promises from policymakers that more may follow, a survey for the bank added to evidence of a slowing economy.

The prospect of further purchases of government bonds by the BoE has fuelled buying of gilts by private investors, driving 10-year yields to just 0.52 percent, a quarter of what they were at the start of this year.

A strong take up of the bank's latest bond buying auction on Wednesday also eased any concerns about demand raised by a 52-million-pound shortfall in its purchase of bonds with maturities of longer than 15 years a day earlier.

"Its been about the gilt market today," said a dealer with one London brokerage.

With the dollar down across the board, the pound was steady at $1.3006, having earlier reached $1.3095. It eased 0.5 percent to 85.90 pence to the euro. Sterling has been under pressure since Britain's vote on June 23 to leave the European Union, but with data only just beginning to seep in, the jury is still out on the scale of the immediate blow to growth.

"The core story for the pound is the same: the authorities like the idea of a cheaper currency so we are probably headed lower," New York Mellon's head of global market research, Simon Derrick, said.

"But for now it will mostly be about relative bullishness and bearishness of the dollar on any particular day."

Data released on Tuesday showed industrial output grew at the fastest rate since 1999 in the second quarter of this year. But the trade deficit surged in June, a sign of how exposed Britain is to any slackening off of inward investment.

"The pound is back above the 1.3000 level versus the dollar but that is unlikely to prove sustainable," Bank of Tokyo-Mitsubishi's European head of global markets research, Derek Halpenny, said.