Traders flee pound

The shine is starting to come off the U.K. pound, which has relinquished its reign as the most popular bullish bet among Group of 10 currencies.

Hedge funds and other large speculators cut their net wagers on a sterling advance by 28,915 contracts in the past three weeks, the biggest reduction in a year, data from the Commodity Futures Trading Commission in Washington show. The currency slipped to $1.6903 as of 9:49 a.m. in New York, from an almost six-year high of $1.7192 on July 15, amid speculation much of the good news on Britain’s economy is already reflected in the exchange rate.

“There have been pullbacks in the past, but this time it may be different,” John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said yesterday by phone. “At this level, sterling will need constant new inputs to justify its price. We may have seen the top in the pound-dollar exchange rate.”

While the U.K. has recovered the output lost during the financial crisis and is on track to be this year’s best-performing Group of Seven economy, investors say sterling will start to face headwinds. The U.S. Federal Reserve is on course to end its dollar-depressing bond purchases this year and, in London, Bank of England Governor Mark Carney has sought to temper bets on the higher interest rates that would make the pound more profitable for investors to hold.

Too strong

Sterling has appreciated 11 percent against the dollar in the past year, the most among 31 major currencies tracked by Bloomberg. Against a basket of nine other developed-market peers, it has gained almost 12 percent, Bloomberg Correlation- Weighted Indexes show.

The International Monetary Fund said yesterday in its External Stability Report that the pound’s overvalued by 10 percent to 15 percent. Saxo Bank sees it falling about 4 percent to $1.62 by year-end. The median estimate of more than 60 strategists in a Bloomberg survey is for the currency to stay little changed at $1.70.

Britain’s pound has been driven higher by the nation’s recovery, with growth domestic product seen expanding this year by 3 percent in a survey of more than 50 economists.

Rate outlook

Speculation has increased that Carney, who took the helm at the BOE just over a year ago, will raise the bank’s 0.5 percent main interest rate in 2015. Higher rates tend to attract international investment.

The 49-year-old tempered those expectations in a July 23 speech in Glasgow, Scotland, saying that, once they start, increases will be “gradual and limited.” He said “extraordinary forces” still confront the U.K. economy.

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