Bloomberg News

Pound Advances Versus Euro on European Debt Concerns; Gilts Fall

October 01, 2011

Oct. 1 (Bloomberg) -- The pound strengthened for a second straight week against the euro as concern European policy makers will fail to resolve the region’s sovereign debt crisis spurred demand for the perceived safety of the British currency.

Sterling gained against all but one of its 16 major peers tracked by Bloomberg this week amid uncertainty over whether Greece will receive its next round of emergency loans. The pound strengthened for the first time in six weeks against the dollar, snapping its longest losing streak in more than a year. U.K government bonds fell. The Bank of England will report its next interest-rate and bond-buying decisions on Oct. 6.

“Investors are looking for an alternative to the euro, and the pound benefits,” said Neil Jones, London-based head of European hedge-fund sales at Mizuho Corporate Bank Ltd. “The U.K. has a stronger element of flexibility, autonomy and independence.”

Sterling strengthened 1.5 percent this week versus the euro to 86.08 pence at 5:11 p.m. in London yesterday. The pound appreciated 1.1 percent to $1.5619. That’s its first weekly gain against the dollar since the five days ending Aug. 19. The U.K. currency appreciated 1.8 percent to 120.46 yen, also its first weekly increase since Aug. 19.

The pound has gained 3.4 percent in the past three months, the third-best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. That pares the 12-month decline to 2.3 percent.

Aid Disbursement

Euro-region finance ministers are unlikely to decide on the disbursement of the next tranche of aid to Greece when they meet on Oct. 3 because a report by the International Monetary Fund, European Central Bank and European Commission has been delayed, German Deputy Finance Minister Joerg Asmussen said Sept. 25.

Bank of England policy makers have indicated they are becoming more concerned the economic recovery will cool further and most of them said last month they see expanding stimulus as “increasingly probable.”

Minutes of last month’s Monetary Policy Committee meeting, released on Sept. 21, showed members voted 8-1 to maintain the size of the asset-purchase plan, known as quantitative easing, at 200 billion pounds. They were unanimous in keeping the benchmark interest rate at a record low 0.5 percent.

Bank of England Chief Economist Spencer Dale said Sept. 29 that policy makers have the tools available to provide additional “monetary loosening.” MPC member Ben Broadbent said on Sept. 26 that he was “reasonably close” to voting for more QE, while David Miles said the case for stimulus has become more “finely balanced.”

Default Risk

The pound “remains supported by the fact that default risk is virtually non-existent in the U.K. given the BOE’s policy settings,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “The U.K. is fine as long as the BOE can print more money. If they are unable, the pound and gilts will be in serious trouble.”

Gilts fell as yields near record lows deterred investors. Ten-year yields rose seven basis points this week to 2.43 percent, while the two-year yield added four basis points to 0.58 percent.

The U.K. Debt Management Office plans to sell an additional 3.25 billion pounds of the benchmark 3.75 percent gilt due in September 2021 on Oct. 4.

--With assistance from Scott Hamilton in London. Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: 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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