Bloomberg News

Pound Strengthens on Report SNB to Raise Holdings; Gilts Gain

September 29, 2011

Sept. 29 (Bloomberg) -- The pound rose to a one-week high versus the dollar and erased a decline against the euro on speculation the Swiss National Bank will boost the percentage of sterling holdings in its portfolio.

The U.K. currency reversed losses versus the franc after Reuters quoted a senior portfolio manager at the Swiss central bank as saying it will probably have a higher proportion of sterling assets in a year’s time. Werner Abegg, a spokesman for the SNB, declined to comment. Ten-year gilts rose, snapping a four-day drop, amid speculation the Bank of England will add economic stimulus by buying bonds as soon as next month.

“There are some newswire reports suggesting the SNB would start to increase its weighting of sterling within its reserves,” said Ian Stannard, London-based head of European currency strategy at Morgan Stanley. “That’s giving sterling some support.”

The pound gained 0.7 percent to $1.5671 at 5:10 p.m. in London, after reaching $1.5716, the strongest level since Sept. 21. The currency was little changed at 86.99 pence per euro, after weakening as much as 0.4 percent. Sterling rose 0.1 percent to 1.4031 francs.

An increase in the SNB’s holdings of sterling assets probably wouldn’t boost the British currency beyond a “knee- jerk” reaction, according to Sara Yates, a foreign-exchange strategist at Barclays Plc in London.

‘Big Impact’

“Sterling is such a liquid currency that even at the margin it’s unlikely to have a big impact,” London-based Yates said in a telephone interview. “It would need to be a significant change to have any meaningful impact.”

Sterling has strengthened 2.6 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes which compares the foreign exchange of 10 developed nations. The dollar has risen 5.4 percent.

Two-year gilt yields fell the most in a week after Bank of England Chief Economist Spencer Dale said policy makers have the tools available to provide additional “monetary loosening.”

U.K. house prices were little changed in September and “downside risks” to the property market have increased as economic prospects weaken, Nationwide Building Society said. A separate report showed mortgage approvals rose last month.

“Given the potential magnitude of announcement effects, it would make sense for gilts to remain relatively supported,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. The central bank is likely to start a so-called quantitative-easing program with 50 billion pounds of debt purchases in November, he said.

The 10-year gilt yield fell two basis points to 2.53 percent. The two-year rate declined one basis point to 0.58 percent after dropping as much as five basis points, the most since Sept. 22.

Gilts have returned 7.8 percent in the third quarter, more than the 7.1 percent increase in German bunds and 6.1 percent gain from U.S. Treasuries, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies showed.

--With assistance from Fergal O’Brien and Jennifer Ryan in London. Editors: Matthew Brown, Nicholas Reynolds

To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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