Sterling falls as gilt auction fails to find buyers

The pound fell sharply against the euro yesterday, losing around 2 cents following news from the British Debt Management Office, which conducts UK Treasury bond auctions, that there weren’t enough interested buyers for the UK government’s £1.75 billion gilt auction. This is the first time in almost seven years that such an auction has failed, which puts Prime Minister Gordon Brown in a precarious position. The British government plans to sell a record £146.4 billion worth of gilts this year and up to £147.9 billion next year to pay for the tax cuts and fiscal spending intended to dig the UK out of recession. But with demand seeming lackluster it may become increasingly difficult and more expensive for the government to fund its economic recovery efforts.

Sterling was also undermined yesterday by a sharper than expected fall in the Confederation of British Industry's distributive trades survey balance.

M3 Money Supply figures are released in the eurozone this morning, while Retail Sales figures are due from the UK today.

Pound falls against the US dollar

The pound weakened against the US dollar yesterday by 1.25 cents to close the day at the 1.4553 level. This was on news that there was not enough interested parties willing to purchase UK government bonds. The British Debt Management Office reported that they could not sell their $1.75 billion gilts at auction, which is the first time this has happened in 7 years and raises serious questions about Britain’s ability to pay for its planned spending in the coming years. Trading was very choppy in the second half of the session after Treasury Secretary Geithner surprised the markets by suggesting he was open to expanding the use of the International Monetary Fund’s special drawing rights. Investors initially took this as an endorsement of China’s proposal on Monday to replace the dollar as the world’s reserve currency, however an initial sell off in the dollar was later reversed.

In today’s trading the market has remained around yesterday’s close ahead of the announcement of Retail Sales and Total Business Investment figures in the UK, whilst in the US Gross Domestic Product and Jobless Claims data will be released this afternoon.

Dollar weakens against the euro

The dollar weakened against the euro yesterday as investors weighed prospects for a US economic recovery in light of the US government’s plan this week to cleanse banks of bad assets. The dollar was also undermined when US Treasury Secretary, Timothy Geithner, shocked the markets by saying Washington was open to the idea of a new global reserve currency run by the International Monetary Fund to replace the dollar. However, the dollar regained some support when Geithner later qualified his remarks by reaffirming the dollar's role in the world financial system, and President Obama stated that the dollar remained a strong currency.

The euro gained ground despite grim data out in the eurozone, including news from Germany that business confidence fell to its lowest level ever in March. However, some analysts expect the euro to weaken next week as many predict the ECB will announce a further interest cut, and some expect the central bank to discuss quantitative easing measures at their next meeting as well.

There are several significant announcements taking place in the US today including Gross Domestic Product and Jobless Claims.

New Zealand dollar remains in recent ranges

The New Zealand dollar remained in recent ranges yesterday, despite figures revealing a slip in consumer confidence. Markets had expected a decline in this figure, reflecting the gloomy economic environment, but were in fact surprised the decline was so modest. Investors will now focus on key domestic data out over the next two days, which includes Gross Domestic Product data this evening.

Australian dollar recovers from previous day's losses

The Australian dollar recovered from previous day’s losses against sterling yesterday, after data revealed UK retail sales fell more sharply than expected in March. Sterling was also weighed down by a Gilt auction not being fully covered, suggesting a reduced demand for sterling assets. Analysts blamed this in part on the BoE, who created some uncertainty in the market by saying they may scale back their program of gilt purchases if it was especially successful in spurring the economy. Further UK retail figures will be released today.