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Pound drops more than 1% as Bank of England steps into bond market

LONDON, Sept. 28 (Reuters) – The British pound fell more than 1% against the dollar and the euro on Wednesday after the Bank of England said it would step in to calm the UK’s frenzied bond markets.

The pound was on track for its biggest monthly decline since October 2008, just after Lehman Brothers collapsed.

The Bank said it will make temporary bond purchases and postpone the planned start of its gold sales program. It will buy long-dated UK government bonds from Wednesday, it said, buying as many as it needs to calm the market. read more

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Sterling last fell 1.41% to $1.0586, after hitting a session low of $1.0539. The euro rose 1.25% against the pound at 90.53 pence.

The Bank’s dramatic move came after a morning of turmoil in the gold market. The BOE said it could not let the dysfunction continue as the UK’s financial stability would be endangered.

UK financial markets have contracted in recent days after the new Chancellor of the Exchequer, Kwasi Kwarteng, announced plans to cut taxes and ramp up borrowing.

The fiscal statement — and Kwarteng’s vow that more would come — shocked investors and caused the pound to collapse to a record low of $1.0327 on Monday.

But UK government bonds have come under the heaviest pressure, with prices plummeting and yields rising.

However, the Bank’s intervention on Wednesday appeared to calm the market, at least temporarily. The return on the 30-year benchmark gel fell by more than 50 basis points at one point.

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Kenneth Broux, currency strategist at Societe Generale, said the Bank had to step in because “confidence has completely evaporated”.

“The sharp rise in bond yields threatens the housing market and the economy in general,” he said.

Chris Turner, head of markets at ING, said many traders remained pessimistic about sterling. He said the BOE’s intervention “effectively provides room for the government to continue with its aggressive fiscal program.”

“Overall, we would prefer a little more real stability in today’s intervention, but market conditions remain feverish,” Turner said.

Analysts said the dollar’s strength weighed heavily on the pound as well. Investors rushed to dollar safety this year as the global economy has slowed and market volatility has increased.

The dollar index reached a new 20-year high of 114.78 on Wednesday, most recently it rose 0.39%.

“We’re in the really powerful phase of a dollar rally,” Turner said. “It is an inopportune time for UK policymakers to come forward with an unfunded fiscal stimulus package.”

Sterling has fallen nearly 22% against the dollar this year, the most since 2008 and more than 7% against the euro. It fell by more than 15% in 2016, when the Brexit vote took place.

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Reporting by Harry Robertson and Alun John; Editing by Amanda Cooper, David Evans and Hugh Lawson

Our standards: The Thomson Reuters Trust Principles.

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