LONDON Dec 20 Sterling fell for a second
straight day against the dollar on Friday, hurt by a
bigger-than-expected current account deficit and larger
government borrowings, with rising U.S. yields also helping the
Official data showed Britain's deficit with the rest of the
world widened to 20.7 billion pounds from 6.2 billion in last
second quarter, equivalent to 5.1 percent of GDP - its biggest
share since the third quarter of 1989, and much higher than the
13.85 billion forecast.
The biggest current account deficit in decades may worry
Bank of England policymakers who earlier this week flagged
concerns about the adverse impact of a higher exchange rate on
the recovery and efforts to make the economy more
export-orientated and less dependent on credit-fuelled domestic
Data also showed that public finances suffered in November
with public sector net borrowing at 16.505 billion pounds, up
from 15.586 billion pounds a year earlier.
The twin deficits dragged the pound lower against the dollar
and offset any impact from a higher year-on-year reading of
final third-quarter gross domestic product. Sterling fell 0.25
percent to $1.6332, compared with $1.6360 before the UK
data was released.
"The blow out in the current account deficit isn't great
news and we get the feeling that most of the good news is
already priced into sterling," said Jeremy Stretch, head of
currency strategy at CIBC World Markets.
"A move towards $1.6450 certainly appears to be a sell
unless we get more data that shows that demand is holding up
well in the economy."
Part of the pound's weakness was also because the dollar
extended gains after the Fed voted to reduce its monthly asset
purchases by $10 billion. After a subdued initial reaction, the
reduction in Fed stimulus has lifted U.S. bond yields
and buoyed the greenback.
The euro also gained around 0.1 percent against sterling,
rising to 83.55.
Despite its recent losses, the pound is on track to post
gains against the dollar this year. Gains have picked up in the
last six months as the UK economy improved faster than many of
its European peers and investors have priced in the chance of an
earlier than previously expected rate hike by the BoE.
The BoE said in its forward guidance in August that it would
not consider raising rates until unemployment fell below 7
percent, something it expected to happen by the end of 2016. It
was forced to revise that message, stressing rates would not
rise any time soon, after admitting unemployment could hit 7
percent as early as the fourth quarter of 2014.
This week data showed the jobless rate at 7.4 percent
leading the sterling overnight interbank average rates to price
in the chance of a rate hike within 15 months, compared with two
years before the numbers were released.
Analysts expect the BoE to quell these expectations by
sticking to its pledge to keep rates low for longer. BoE
policymakers could step up their rhetoric against the further
sterling gains, they said.
"The potential for further sterling upside is a threat to
the economic recovery," said Jane Foley, senior currency
strategist at Rabobank.
"The (BoE's) Monetary Policy Committee voiced its
dissatisfaction in the minutes of the December policy meeting.
The Bank cannot, however, complain that sterling is overvalued
since it remains below its long term trend versus both the
dollar and the euro."