Bloomberg News

Pound Reaches 18-Month High Versus Euro on Europe Crisis

April 16, 2012

The pound reached the strongest level in 18 months against the euro as investors sought the perceived safety of U.K. assets amid concern Europe’s debt crisis is deepening.

Sterling advanced for a second day versus the 17-nation euro after an industry report showed asking prices for U.K. homes increased to a record, adding to signs Britain’s economy will outperform Europe’s. Gilts gained. Bank of England policy makers kept their asset-purchase target, or quantitative easing, at 325 billion pounds ($515 billion) at this month’s meeting, the minutes of which will be published on April 18.

“The pound is doing quite well -- it’s the European sovereign debt crisis,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “You increasingly see the buying of U.K. safe-haven securities such as gilts. There’s much less of a likelihood that we’re going to have further QE. That’s less of a burden for the pound.”

The U.K. currency appreciated 0.1 percent to 82.46 pence per euro at 4:11 p.m. London time after rising to 82.10 pence, he strongest level since Sept. 9, 2010. Sterling was little changed at $1.5851.

The pound has climbed 0.6 percent in the past month, the second best performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes after the yen, which gained 4.8 percent. The euro dropped 0.5 percent.

Home Prices

Average asking prices for homes in England and Wales gained 2.9 percent in April, according to Rightmove Plc, the operator of Britain’s biggest property website. Prices in London increased 2.1 percent from the previous month to a record 464,944 pounds. In a separate report today, BDO LLP said its output index rose to about the 95 level that indicated growth for the first time since last summer.

Gilts gained for a second day as the European concerns spurred demand for safer assets. The yield on the 10-year gilt fell one basis point, or 0.01 percentage point, to 2.03 percent. The 4 percent bond maturing in March 2022 rose 0.09, or 90 pence per 1,000-pound face amount, to 117.55.

U.K. government bonds pared gains after a U.S. report showed retail sales rose more in March than analysts forecast, boosting investors’ appetite for higher-yielding assets. Sales climbed 0.8 percent, versus the median 0.3 percent gain forecast by economists surveyed by Bloomberg.

‘Uncertain Euro’

The pound will weaken against the dollar because of its exposure to the euro area, according to Morgan Stanley. A decline below $1.5830 will trigger a renewed sell signal for the British currency, the bank said in an e-mailed note today.

“High exposure into a slowing and uncertain euro zone will weigh on the pound,” wrote Morgan Stanley analysts including Hans-Guenter Redeker, head of currency strategy in London. “Underlying economic data, as highlighted by the recent trade numbers, remain fragile.”

Morgan Stanley predicts the Bank of England will expand its bond-purchase program next month to support the economy, putting additional pressure on the pound. Policy makers meet to review monetary policy on May 10.

Prime Minister David Cameron’s austerity policies, which helped U.K. debt beat world peers in 2011, are backfiring in the bond market with the economy on the brink of a recession and borrowing needs approaching records.

Gilts lost 1.9 percent in the first quarter, the worst start since 1996, after returning 17 percent last year, according to Bank of America Merrill Lynch indexes. Falling revenue means government bond sales in the next 12 months will be 64 percent higher than the average over the past decade.

The Debt Management Office is scheduled to auction 1.35 billion pounds of inflation-linked bonds due 2029 on April 19. It will sell bills the following day.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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