Bloomberg News

Pound Rises 5th Week Versus Euro on Europe Debt Woes; Gilts Fall

January 07, 2012

Jan. 7 (Bloomberg) -- The pound rose for a fifth week against the euro as signs the European debt crisis is worsening spurred demand for the relative safety of the U.K. currency.

Sterling climbed to the strongest in 15 months versus the single currency after French borrowing costs increased at an auction this week and reports showed European economic confidence and German factory orders declined. Ten-year gilts completed the first weekly loss since November as yields near a record low damped demand for the securities.

“The pound might strengthen towards 80 pence per euro at some point in the next few weeks, and that’s not because the U.K. is wonderful,” said Kit Juckes, head of currency research at Society Generale SA in London. “We have a sense that the measures that would bring the euro crisis to an end could be put in place with one summit over one weekend, but that’s true for six months and it hasn’t happened.”

The pound appreciated 1 percent this week to 82.48 pence per euro at 4:55 p.m. in London yesterday after rising to 82.39 pence, the strongest level since Sept. 10, 2010. The five-week gain is the longest since June 2009. Sterling fell 0.7 percent this week to $1.5430, and dropped 0.5 percent to 118.91 yen.

France sold 4.02 billion euros of the bonds maturing in October 2021 at an average yield of 3.29 percent on Jan. 5, up from 3.18 percent on Dec. 1. The nation has the biggest debt burden of the six top-rated euro nations, at 85 percent of gross domestic product.

Europe’s Slowdown

An index of executive and consumer sentiment in the 17- nation euro area fell to 93.3 in December, the European Commission in Brussels said yesterday. Factory orders in Germany, the region’s largest economy, dropped 4.8 percent in November, the most in almost three years, according to the Economy Ministry in Berlin.

French President Nicolas Sarkozy will meet German Chancellor Angela Merkel on Jan. 9 in Berlin to discuss the region’s debt crisis after he hosted Italian Prime Minister Mario Monti on Jan. 6.

Sterling has risen 2.9 percent in the past six months according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Only the yen and dollar have risen more. The euro tumbled 5.2 percent during the same period.

Gilts Drop

Ten-year gilts fell for the first time in six weeks after U.K. government debt returned 17 percent on average in 2011, including reinvested interest, the most among 26 government markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

The 10-year yield climbed four basis points this week to 2.02 percent after falling to a record 1.93 percent on Dec. 30. Two-year yields increased seven basis points to 0.4 percent.

The sell-off in gilts is likely to be short-lived as the European crisis drives demand for AAA rated U.K. government bonds, said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London.

Overseas investors boosted their gilt holdings by 16.3 billion pounds in November, the most since September 2008, according to Bank of England data released Jan. 4.

“The situation in the euro region has not fundamentally changed,” Wraith said. “I don’t think the bullish trend for gilts is over.”

The Bank of England will keep its benchmark interest rate unchanged at 0.50 percent when policy makers meet on Jan. 12, according to all 53 economists in a Bloomberg survey.

--Editors: Nicholas Reynolds, Mark McCord

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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