British Pound Advances on Speculation Prudential Takeover of AIG May Fail

The pound rose against the dollar on bets that Prudential Plc’s $35.5 billion takeover of American International Group Inc.’s main Asian unit may fail, easing concern the accord will prompt outflows of the U.K. currency.

Sterling also rose to the strongest level in 18 months against the euro after reports showed U.K. house prices had their biggest annual gain in more than 2 1/2 years in April and manufacturing stayed at the strongest level in more than 15 years last month. Ten-year gilt yields held near the lowest in a week after the European Central Bank said the region’s lenders may have to write off 195 billion euros ($237 billion) of bad debts by 2011, buoying demand for the safest assets.

Some investors may be “trading sterling on whether or not the Prudential deal comes off,” said Paul Bednarczyk, a currency strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. “If the deal is off, and it looks like it is going to be off, then Prudential won’t have to sell” pounds to pay for it, he said.

The pound climbed 1 percent to $1.4683 as of 3:23 p.m. in London, after earlier losing as much as 0.7 percent. Against the euro, it climbed 1.1 percent to 83.69 pence. It earlier traded at 83.24 pence, the strongest level since Dec. 1, 2008.

A Prudential spokesman in London, who wouldn’t be identified, declined to comment on currency moves.

The yield on the 10-year gilt fell less than one basis point to 3.57 percent after dropping earlier to 3.52 percent, the least since May 26. The two-year yield rose almost two basis points to 0.89 percent.

‘Boosted Prudential’

While London-based Prudential said it was seeking to lower the price for the AIG assets, New York-based AIG said in its own statement that it “will adhere to the original terms.”

“This has boosted Prudential shares as well as sterling,” Lee McDarby, a trader at Investec Plc’s treasury-solutions unit in London, wrote in a note to clients today.

Prudential jumped as much as 10 percent to 598 pence in London trading.

An index of manufacturing was unchanged at 58, Markit Economics and the Chartered Institute of Purchasing and Supply said today. Home values in England and Wales rose 8.5 percent from a year earlier, the most since September 2007, the Land Registry said.

U.K. government bonds pared gains as the government prepared to sell as much as 6.25 billion pounds of securities maturing in 2015 and 2034 in the next two days. Britain plans to issue 185.2 billion pounds of gilts this fiscal year as it seeks to plug the biggest budget deficit among the Group of Seven nations. The government sold a record 227.6 billion pounds of bonds in the year through March.

Budget Plans

Some investors are gaining confidence in Prime Minister David Cameron’s plan to tame the deficit. Fidelity International, Loomis Sayles & Co. and investors overseeing more than $1 trillion say Cameron, 43, will reduce the deficit and avoid a downgrade of Britain’s AAA credit rating.

Gilts have returned 2.2 percent since Cameron’s Conservatives agreed to govern with the Liberal Democrats on May 11, compared with 1 percent for U.S. Treasuries and 2 percent for German bunds, according to indexes from Bank of America Corp. Merrill Lynch. Sterling gained 1.3 percent against the euro in the same period.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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