Pound Approaches 3 1/2-Year High Versus Euro on Spanish Concern

The pound was within a penny of a three-and-a-half-year high against the euro after Spain said it may need to sell bonds for a banking rescue, underpinning demand for alternatives to the 17-nation shared currency.

Sterling has appreciated 4.3 percent against the euro this year as speculation that Greece may leave the currency bloc bolstered the appeal of British assets as a haven. U.K. government bonds slipped for a second day after an index of British retail sales climbed to its highest level in more than a year in May. The data followed a report last week that showed the nation’s recession was deeper than initially estimated. Britain sold inflation-linked debt at a record-low yield.

“The pound is regarded by continental investors as a relative safe haven,” amid Europe’s turmoil, said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London. “The numbers coming out of the U.K. have been a bit discouraging but that’s not limiting the currency at the moment. Gilts will continue to attract strong demand from investors who are keen to diversify out of local currencies.”

Sterling was little changed at 79.98 pence per euro at 4:28 p.m. London time, after reaching 79.51 pence on May 16, the strongest level since November 2008. It was 0.2 percent weaker at $1.5659.

Derks said the pound may appreciate to 75 pence per euro within three or four months.

Spanish Recapitalization

A spokesman for the Spanish economy ministry said the nation’s preferred option for raising funds to recapitalize Bankia group is via debt markets. Pacific Investment Management Co. money manager Andrew Bosomworth said on Bloomberg Television today that the nation will probably need some form of financial assistance.

The pound has appreciated 2.9 percent this year, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 2.1 percent and the euro dropped 1.8 percent.

Prime Minister David Cameron discussed with Bank of England Governor Mervyn King plans to insulate the British economy from any escalation of the euro-area debt crisis yesterday, Cameron’s office said in an e-mailed statement.

Wolseley Plc (WOS), a U.K.-headquartered plumbing- and heating-products supplier, said today that the stronger pound is hurting its earnings. “If current rates apply throughout the period then fourth-quarter profit growth will be adversely impacted” as it repatriates earnings from the euro region, the company said in a statement, referring to the three months through the end of July.

Inflation Forecast

The 10-year gilt yield rose two basis points after Bank of England policy maker Ben Broadbent said the decision not to increase stimulus this month was justified by the outlook for inflation.

“We still anticipate a decline” in inflation, “but it looks to be taking slightly longer than we had first thought it would,” Broadbent said in an interview with Bloomberg Television’s Linda Yueh. “My answer to the questions as to why policy didn’t change in May: the forecast didn’t warrant it.”

The yield on 10-year bonds advanced to 1.78 percent. It reached an all-time low of 1.738 percent on May 24. The price of the 4 percent bond maturing in March 2022 was at 119.805.

Thirty-year gilt yields may “go a lot lower” as investors seek protection from Europe’s debt crisis, Pimco’s Bosomworth said. The rate was at 3.10 percent today.

U.K. Sales

A gauge of annual U.K. sales growth jumped to 21, the highest reading since April 2011, from minus 6 the previous month, the Confederation of British Industry said today. Data last week showed the U.K. contracted a revised 0.3 percent in the first quarter, deeper than an initial estimate of 0.2 percent.

An index of U.K. consumer confidence fell to minus 32 in May from minus 31 in April, economists forecast before a report to be published by GfK NOP Ltd. on May 31. A U.K. manufacturing index released on June 1 will show output shrank for the first time since December, according to a separate survey.

Britain sold 4 billion pounds of index-linked gilts due in 2062 at a real yield of 0.04 percent, the lowest rate on record for 50-year inflation-protected securities, the Debt Management Office said. Overseas investors bought 17 percent of the debt, the most on record.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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

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