Falling Yield Fears Hit The Pound. By Nicholas Hastings

Sterling is losing its friends fast.

For most of this summer, the pound has remained well above $1.60 on the assumption that as the global economic recovery comes through, the Bank of England will be one of the first to hike rates.

However, that assumption is changing fast.

Rather than being one of the first, the Bank of England is more likely to be one of the last given its concerns over the U.K. recovery.

The central bank first gave some measure of its concern at the start of August, when it increased its quantitative easing program by GBP25 billion and suggested that monetary policy needed to be easier for longer.

Since then, its pronouncements on the U.K. economy have hardly got any better.

In fact, Deputy Governor Charlie Bean appeared to have put the boot in with his mealy mouthed conclusion in a speech late Tuesday that quantitative easing had been "moderately encouraging."

This not only helped to confirm fears that commercial banks are hoarding liquidity rather than passing it down to consumers, but also that instead of starting to wind up its quantitative easing program, the central bank may yet feel the need to extend the program once again.

Minutes of that early August meeting have already shown that Bean as well as the Governor Mervyn King voted for a GBP50 billion increase.

So, even though U.K. economic data may show sporadic evidence of economic growth, markets remain unconvinced about its sustainability and sterling yields have gradually fallen in recent weeks.

This shift, which has taken the yield spread against the euro 50 basis points higher in favor of the single currency in the last month, is expected to now ensure that the euro rallies back over GBP0.90 - a level last seen way back in May.

Whether the pound makes the same sort of losses against the dollar remains to be seen, especially if the U.S. currency itself comes under selling pressure.

However, as a so-called high-yielder that has been benefiting from a general appetite for higher risk assets, sterling could well find itself out of favor again as general concern over the global economic recovery becomes more of an issue.

Currency strategists at BNP Paribas warn that there could be even worse to come.

"Sterling is on its way to becoming the world's funding currency," they said, suggesting that a good play is to short the pound against the world's previous funding currency, the yen.




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Early Thursday in Europe, the pound continued to slide - falling to $1.6219 by 0645 GMT from $1.6245 late Wednesday in New York, according to EBS.

Elsewhere, investors remained averse to risk, despite Wednesday's positive news on U.S. durable goods and home sales. Once again, China appears to be in the driving seat with Chinese stocks falling after the country's state council issued a warning about overcapacity in some industries. The Shanghai Composite Index fell 0.5% while the Nikkei lost 1.6%.

The dollar fell to Y93.52 from Y94.13, while the euro fell to Y133.37 from y134.09. The single currency rose a little, however, to $1.4259 from $1.4245.