Pound Gains Most in Three Months as BOE Bond Purchase Plan Boosts Optimism

The pound strengthened the most in almost three months against the dollar amid optimism the Bank of England’s decision to reactivate its bond-purchase program will help to revive the U.K.’s faltering economy.

Sterling appreciated versus all but one of its 16 major peers after policy makers yesterday boosted the central bank’s quantitative-easing program by 75 billion pounds ($117 billion) and central bank Governor Mervyn King said he was “confident” the measures would work. The European Central Bank reintroduced 12-month loans for banks. The U.K. currency rallied even after Moody’s Investors Service downgraded 12 British financial institutions. Gilts declined.

“The steps that were taken yesterday both in the U.K. and also the ECB have helped alleviate the risk aversion that’s been in the markets in regard to Europe,” said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. Optimism about QE “is not going to provide a sustainable move to the upside for sterling.”

The pound climbed 1.1 percent to $1.5609 at 4:20 p.m. in London after rising as much as 1.3 percent, the biggest intraday gain since July 13. The currency rose 0.7 percent to 86.39 pence per euro, and appreciated 1.1 percent to 119.81 yen.

Sterling has advanced 2.7 percent in the past month and 3.4 percent in the past quarter, according to Bloomberg Correlation- Weighted Indexes, which measure the foreign exchange of 10 developed markets.

The U.K. central bank’s decision yesterday represents the biggest stimulus since the depths of the recession. King said the move, the first loosening of monetary policy since 2009, was a response to what may be the worst financial crisis ever.

Europe Concern

The pound rose for the first time in four days against the euro on speculation French President Nicolas Sarkozy and German Chancellor Angela Merkel remain divided about how to solve the region’s debt crisis.

Merkel has cited the need to prepare for the default that investors see as a sure thing. Sarkozy, whose banks have the most to lose, is unwilling to gamble on letting Greece go. The two will meet in Berlin on Oct. 9 to discuss the debt crisis.

“Sterling is more and more likely to do well against the euro going forward,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “It’s just this sense of inevitability that the euro zone in some way or other is going to unravel.”

Producer Prices

U.K. producer prices rose more than economists forecast in September, the Office for National Statistics said today. Prices charged at factory gates rose 0.3 percent from August. The median forecast of 18 economists in a Bloomberg News survey was for a 0.2 percent increase.

The pound extended its advance against the dollar after a U.S. report showed employers added more jobs last month than economists forecast, easing concerns global growth is slowing and boosting risk appetite.

Sterling advanced even as Moody’s cut the senior debt and deposit ratings of 12 lenders including Royal Bank of Scotland Group Plc, concluding the government would be less likely to provide support for them if they became financially troubled.

Ten-year gilts declined for a third day, pushing the yield up seven basis points to 2.46 percent. The two-year rate was little changed at 0.62 percent.

Gilts have returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, surpassing the 7.3 percent gain for German bunds and 8.8 percent increase for U.S. Treasuries.

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

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