By Paul Dobson Nov. 2 (Bloomberg) -- The pound fell for a second day against the dollar and snapped a five-day gain versus the euro on speculation that forced asset sales by banks may weaken the country’s financial institutions. Sterling depreciated against all but one of the 16 most- traded currencies. Royal Bank of Scotland Group Plc, which received a government bailout last year, said it may need to sell more assets than planned to satisfy the European Union, sending the shares down as much as 14 percent. Gilts dropped after a report showed manufacturing unexpectedly expanded in October at the fastest pace in two years. The pound is falling because of “more worries over the financial sector,” Geoffrey Yu, a foreign-exchange strategist at UBS AG in London, said today by phone. “If the government sell-off of assets is rather disorderly it could hurt the financial sector.” The pound slid 0.5 percent to $1.6369 as of 11:45 a.m. in London, dropping 1.1 percent in the past two days. The U.K. currency weakened 1 percent to 90.36 pence per euro, trimming last week’s 2.8 percent advance, the most since January. The EU is forcing banks that took state money to sell assets to ensure they don’t have an unfair advantage. RBS, based in Edinburgh, may have to sell insurance units and shrink its investment-banking arm after receiving 20 billion pounds ($33 billion) in government aid last year, a person familiar with the matter said last week. Lloyds Banking Group Plc may have to sell assets, and Northern Rock Plc is splitting into two. Gilts Drop “The strong correlation between the U.K. financial system and the pound continues,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd. “Future prosperity of the U.K. economy is heavily dependent” on banking, he said. The yield on the 10-year gilt rose 4 basis points to 3.66 percent. The 4.5 percent security maturing in March 2019 fell 0.34, or 3.4 pounds per 1,000-pound face amount, to 106.59. The two-year note yield climbed 6 basis points to 0.91 percent. “The big surprise this morning was the manufacturing” report, said Vincent Chaigneau, head of currency and fixed- income strategy at Societe Generale SA in London. “That was much stronger than expected.” The Treasury plans to auction 4.75 billion pounds of 2015 notes tomorrow and 2 billion pounds of 2034 bonds in two days. Sterling also dropped amid speculation the Bank of England will extend its bond-buying program this week to revive Britain’s shrinking economy. Policy makers will expand their asset-purchase plan by 50 billion pounds to 225 billion pounds on Nov. 5, according to the median forecast of 48 economists in a Bloomberg survey. Asset Purchases The view of analysts may not be adequately reflected in the pound’s price after gains last week, UBS said today. “Another expansion in the Bank of England’s asset-purchase facility is all but guaranteed,” Gareth Berry, a currency strategist at UBS in Singapore, wrote in a report. “We expect to see considerable sterling downside as Thursday’s meeting approaches, and an extension to the quantitative-easing program is likely to be greeted with renewed sterling weakness.” The pound had its biggest weekly gain against the euro since January last week and rose versus the dollar as traders speculated that improving economic data may prompt policy makers to pause their debt-buying program on Nov. 5, when the central bank also announces its decision on interest rates. Manufacturing Expansion Manufacturing in the U.K. unexpectedly expanded in October at the fastest pace in two years, according to a gauge based on a survey of companies by the Chartered Institute of Purchasing and Supply and Markit Economics. The index rose to 53.7 from 49.9 in September. The median estimate of 30 forecasts in a Bloomberg survey was 50. Readings above 50 indicate expansion. Futures traders pared bets in the week through Oct. 27 that the pound will fall against the dollar, according to data on Oct. 30 from the Washington-based Commodity Futures Trading Commission. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 31,431 on Oct. 27, compared with 43,318 a week earlier.

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