Bank of England move fails to boost pound

The pound lost ground on Monday after the Bank of England announced plans to ease liquidity conditions squeezed by the recent credit crisis.

The central bank said it would offer to swap government bonds worth £50bn for riskier mortgage-backed securities in an effort to ease funding worries and avert a sharp slowdown in the UK housing market.

BoE unveils £50bn debt market plan - Apr-21Der Euro - Apr-20Lex: European inflation spikes - Apr-17Economists gloomier on German growth - Apr-17British consumers worry more about economy - Apr-17Jobs figures bring welcome relief - Apr-17However, the pound fell on the news, dropping 0.5 per cent to $1.9883 against the dollar, losing 0.5 per cent to Y205.95 against the yen and sliding 0.8 per cent to £0.7976 against the euro.

Traders said the reaction to the Bank’s plans reflected the fact that they had already been widely trailed in the press. Indeed, the pound rallied at the end of last week as details of the plans started to emerge.

Paul Mackel said the plans therefore were hardly a surprise to currency traders and were quickly digested.

"It is a classic case of ‘buy the rumour sell the fact’ for the pound," he said. "It also raises the question of whether it is too little too late."

He said the market was now likely to focus on the UK economy, which has been showing signs of a marked deterioration in recent months. This has boosted expectations that the Bank of England would have to cut interest rates further to shore up growth.

"If we have terrible UK retail sales figures on Thursday, the pound could suffer," said Mr Mackel.

Meanwhile, the dollar came under pressure following a rally at the end of last week as results from Citigroup, the US bank, came in better than some investors had feared.

The dollar fell 0.3 per cent to $1.5864 against the euro, eased 0.1 per cent to Y103.55 against the yen and lost 0.5 per cent to SFr1.0120 against the Swiss franc.

Gavin Friend at Commerzbank said that the view that worst of the financial turmoil wrought by the credit crisis was over had supported the dollar, but there was room for sentiment to deteriorate rapidly in the wake of bad corporate and economic news.

"We keep our view that the dollar will come under renewed pressure once a rising number of market participants lose their faith in the current optimistic view and against the backdrop of an economy that will remain sluggish for longer than many currently envisage," he said.

Elsewhere, the Australian dollar rose to a five-week high after producer price inflation rose by almost double the rate expected in the first quarter, dashing expectations that the Reserve Bank of Australia would signal an end to its monetary policy tightening cycle.

"The data suggest that upstream inflation pressures remain strong and that RBA rate cuts remain a long way off, which will continue to see investors buy the Australian dollar on any dips," David Woo at Barclays Capital.

The Aussie rose 0.9 per cent to $0.9415 against the dollar and climbed 0.8 per cent to Y97.50 against the yen.

FT