Pound Rises to 10-Week High Versus Dollar on Europe Optimism, Stock Gains

The pound strengthened to a 10-week high against the dollar as optimism European leaders are moving closer toward resolving the region’s debt crisis damped demand for the relative safety of the greenback.

Sterling headed for its strongest monthly gain versus the dollar since October after Greek Prime Minister Lucas Papademos said progress had been made in debt-swap talks with the nation’s bondholders. European lenders may next month ask the European Central Bank for twice the amount of loans they took in December’s refinancing operation, the Financial Times reported. Data showed U.K. consumer confidence increased to a seven-month high. Ten-year gilts rose for a fifth day.

“The pound is being driven by a broader uptick in risk sentiment,” said Elizabeth Gregory, a market strategist at Swissquote Bank SA in Geneva. “A lot of people are encouraged that European financial operations are going to handle all of their imminent funding needs.”

The pound gained 0.5 percent to $1.5783 at 4:09 p.m. London time after climbing to $1.5797, the strongest level since Nov. 21, and has risen 1.5 percent over the month. Sterling appreciated 1 percent to 82.82 pence per euro and was little changed at 120.41 yen.

European chiefs meeting in Brussels yesterday agreed to accelerate the introduction of a permanent 500 billion-euro ($660 billion) rescue fund and signed a deficit-control treaty. Papademos said he’s “strongly committed” to reaching a debt- swap agreement with Greece’s creditors.

The FTSE 100 Index (UKX) of shares gained 0.2 percent and the Stoxx Europe 600 index rose 0.7 percent.

ECB Lending

The ECB lent European financial institutions 489 billion euros in three-year loans on Dec. 21 as part of its measures to encourage banks to maintain lending. Some banks may double or triple their requests at the next operation, the FT said, citing three unnamed chief executive officers.

The U.K. currency snapped yesterday’s decline against the dollar after GfK NOP Ltd. said its gauge of U.K. consumer sentiment climbed four points from December to minus 29, the highest reading since June. Consumers’ outlook for the economy and their personal finances also improved.

Mortgage approvals rose less than economists forecast in December and consumer credit fell the most on record, a separate report from the Bank of England showed.

The pound has weakened 0.5 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar dropped 2 percent, and the euro weakened 1.1 percent.

Gilts Drop

The yield on the 10-year gilt fell two basis points, or 0.02 percentage point, to 1.97 percent after earlier climbing five basis points to 2.04 percent.

Overseas investors cut their gilt holdings by the most since March 2009 last month, according to the Bank of England. Investors sold a net 10.66 billion pounds of U.K. government debt, compared with net purchases of 16.3 billion pounds in November, data published on the central bank’s website showed.

Gilts have handed investors a 0.1 percent return this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries gained 0.2 percent.

Since the Bank of England expanded its debt-purchase program on Oct. 6, gilts have returned 0.5 percent after volatility was taken into account, according to Bloomberg risk- adjusted return rankings.

The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns are not annualized.

The U.K. plans to auction as much as 7.25 billion pounds of bonds and bills this week.

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.

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