The pound rose to a four-week high versus the dollar on speculation U.S. lawmakers are struggling to agree on how to avert the so-called fiscal cliff of spending cuts and tax increases that may push the nation into recession.
Gilts fell for a third day before Bank of England policy makers meet this week, when they are forecast to keep on hold an asset-purchase program to stimulate the economy. Chancellor of the Exchequer George Osborne will deliver his interim budget to parliament tomorrow after saying on Dec. 2 it’s taking longer than planned to balance Britain’s public finances, the first hint that he may extend austerity.
“The U.S. fiscal stalemate is creating a loss of confidence in the dollar,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There is some suggestion that the autumn statement will reiterate continued fiscal prudence. A combination of tight fiscal and a less loose monetary policy means the pound is outperforming.”
The pound rose 0.2 percent to $1.6117 at 11:15 a.m. London time after advancing to $1.6130, the strongest since Nov. 2. Sterling was little changed at 81.10 pence per euro. It depreciated to 81.33 pence on Nov. 30, the weakest level since Oct. 24.
The Bank of England’s Monetary Policy Committee will maintain its so-called quantitative-easing target at 375 billion pounds when it meets on Dec. 5-6, according to all 36 economists in a Bloomberg News survey. Deputy Governor Charles Bean said last week officials should keep open the option to expand stimulus.
The pound stayed higher against the dollar even after Markit Economics and the Chartered Institute of Purchasing and Supply said an index of activity in the construction industry fell to 49.3 last month from 50.9 in October. The median estimate of nine economists in a Bloomberg News survey was for a reading of 50.5, where less than 50 indicates contraction.
The 10-year gilt yield added two basis points, or 0.02 percentage point, to 1.84 percent. It has climbed nine basis points since Nov. 29. The 1.75 percent bond due in September 2022 fell 0.145, or 1.45 pounds per 1,000-pound face amount, to 99.22.
The British Chambers of Commerce said today the U.K.’s recovery will be slower than previously forecast, citing a weaker global backdrop and the likelihood of further fiscal tightening by the government.
The BCC lowered its 2013 growth forecast to 1 percent from 1.2 percent in September and its 2014 projection to 1.8 percent from 2.2 percent, the London-based group said in a report.
“It’s clearly taking longer to deal with Britain’s debts, it’s clearly taking longer to recover from the financial crisis than anyone would have hoped,” Osborne said on BBC Television’s “Andrew Marr Show” in London on Dec 2.
Sterling has gained 1.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.7 percent and the dollar fell 2.6.
Gilts returned 3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.6 percent and U.S. Treasuries earned 2.7 percent.