Pound Rallies Versus Dollar as Retail Sales Boost U.K. Recovery Optimism

The pound rose against the dollar as reports on manufacturing and consumer spending added to evidence the U.K. economic recovery is picking up, boosting demand for British assets amid Europe’s sovereign-debt crisis.

Sterling climbed to its strongest level in almost two weeks against the dollar. Sales at stores open at least 12 months climbed 0.7 percent in November from a year earlier, adding to a 0.8 percent gain in October, the British Retail Consortium said. Manufacturing output rose in October by twice as much as economists predicted, a report showed today. Gilts fell as stocks advanced and as the government sold 2 billion pounds ($3.16 billion) of bonds due in 2049.

“U.K. data has been solid relative to expectations,” helping to support the pound, said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “Sterling is a currency that relates very well to data.”

The pound gained 0.6 percent to $1.5816 at 4:10 p.m. in London, paring the decline against its U.S. peer since the end of 2009 to 2.1 percent. Sterling earlier traded at its strongest level since Nov. 24 versus the dollar. It was 0.4 percent stronger at 84.36 pence per euro.

Declines in gilts pushed the 10-year yield up five basis points to 3.44 percent. The two-year yield also rose two basis points, to 1.02 percent while that on the 4.25 percent security maturing in December 2049 increased for a fifth day, rising three basis points to 4.36 percent.

Stocks Rise

The FTSE 100 stock index climbed as much as 1.3 percent to the highest in almost a month. The MSCI World Index of stocks climbed 0.7 percent, gaining for a fourth day out of five.

The 0.6 percent growth pace in manufacturing in October was up from 0.1 percent in September, and beat the 0.3 percent median estimate in a Bloomberg survey of 23 economists.

Britain’s currency has gained 0.5 percent in the past month, compared with a 2.6 percent decline by the euro, according to Bloomberg Correlation-Weighted Currency Indexes, which track the performance of a basket of 10 peers. Gilts lost 1.2 percent this month, cutting their gain this year to 6.5 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Sterling is benefiting and gilts losing favor as investors bet that signs the economic recovery is picking up steam as inflation remains above target will make it less likely the Bank of England will boost its 200 billion-pound bond-purchase program, known as quantitative easing. Investors have dubbed prospects for a second round of such easing “QE2.”

Policy makers will keep their benchmark lending rate at 0.5 percent in two days’ time, according to all 58 economists surveyed by Bloomberg.

Breakeven Rate

“The door to QE2 has not been closed in the U.K., but implementation will depend on clear evidence of economic slowdown in 2011 and confidence from the Monetary Policy Committee that higher inflation is not dislodging inflation expectations,” Kenneth Broux, a senior market economist at Lloyds Banking Group Plc in London, wrote in an e-mailed note today.

The 10-year breakeven rate, a measure of inflation expectations, was at 2.92 percentage points today, from 2.89 percentage points yesterday. The rate has rebounded from 2.476 on Aug. 31, the lowest level this year. Consumer prices increased 3.2 percent in October, forcing Bank of England Governor Mervyn King to write a letter to Chancellor of the Exchequer George Osborne explaining why the 3 percent upper limit was breached.

Today’s bond sale attracted bids equivalent to 1.82 times the amount on offer, up from a so-called bid-to-cover ratio of 1.81 times at a sale in January, Debt Management Office data showed. A sale of the securities in June 2009 was oversubscribed by 2.30 times.

The U.K. will sell 3.5 billion pounds of bonds maturing in 2016 on Dec. 15, followed the next day by an offering of 825 million pounds of inflation-linked securities due in 2042, the debt agency said in a separate statement today.

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

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

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