Why is the pound falling today? In early trading in Europe on Tuesday, the dollar rose broadly and the pound weakened amid new signs of trouble in the U.K. government bond market.

The Bank of England said it would expand its bond purchases to include index-linked bonds after Monday’s disorderly sell-off in that asset class, which appeared to have been caused once again by pension funds raising cash to meet margin calls on longer-term interest rate swaps.

“Dysfunction in the [index-linked bond] market and the prospect of automatically intensifying ‘fire sale’ dynamics pose a significant risk to the financial stability of the UK,” the Bank said in a published statement.

Why is the GBP falling? 

Why is the GBP falling? The move raises doubts about whether the Bank will be able to stop direct bond purchases on Friday as previously planned. On Monday, it said it would replace the daily auctions with repo operations, whose impact on the money supply – and hence on inflation – could be mitigated by other money market management actions.

Index-linked bonds are the safest security in the world of U.K. financial assets, given that their yields are linked to inflation. What the Bank has called a “fire sale” is unprecedented in recent history.

By 07:00 GMT, the pound was down 0.4% against the dollar at $1.1013, having initially broken through the $1.10 level. The dollar index, which tracks its exchange rate against a basket of 6 developed currencies, rose 0.2% to 113.28.

Earlier we reported that the dollar continues to appreciate against most currencies.