U.K. Pound Falls Against Dollar, Euro as Manufacturing Shrinks

London - The pound declined against the dollar and euro, erasing earlier gains, after a report showed manufacturing unexpectedly contracted last month, adding to concern the recession has further to run.

The British currency traded near the lowest level since June against the euro and two-year bond yields declined to a record low. An index of U.K. manufacturing dropped to 49.7 in August from 50.2 in July, a survey by the Chartered Institute for Purchasing and Supply and Markit Economics showed today. Economists polled by Bloomberg forecast an increase to 51.5.

“The fact that it’s below that 50 level is a big disappointment, psychologically, for the market,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “I’m not surprised to see sterling selling off a little bit.”

The pound weakened to 88.31 pence per euro as of 10:13 a.m. in London, from 88.01 pence yesterday. It weakened to 88.39 pence on Aug. 27, the weakest level since June 5. Sterling fell to $1.6258, from $1.6287 yesterday and $1.6376 earlier today.

The FTSE 100 Index of stocks headed for its biggest loss in two weeks. Employment levels at British, French and German financial services firms won’t return to last year’s figure before 2013, according to a study by the City of London.

The two-year gilt advanced, pushing the yield down 6 basis points, or 0.06 percentage point, to 0.79 percent, the lowest since Bloomberg started collecting the data in 1992. The 4.25 percent security due in March 2011 increased 0.08, or 80 pence per 1,000-pound face amount, to 105.19. The 10-year yield fell 3 basis points to 3.52 percent.

Losses by the pound were limited after Bank of England figures showed mortgage approvals rose to the highest level in 15 months in July. Banks granted 50,123 home loans in July, compared with 47,891 in June, the central bank said. Economists predicted 50,100, according to the median of 26 forecasts in a Bloomberg News survey.

“The worst is probably over for the pound,” said Elisabeth Andreew, chief currency strategist at Nordea Bank AB in Copenhagen. “We believe it will strengthen a bit as market indicators continue to improve.”