The pound strengthened for a fourth year in 2012 against the euro as investors seeking a haven from Europe’s debt crisis pushed the currency higher, even as the Bank of England raised its so-called quantitative-easing target.
U.K. gilts advanced for a third year, pushing yields on British two-, five-, 10- and 30-year bonds to the lowest on record, as the financial turmoil in the euro area and the Bank of England’s asset-buying program boosted demand. The pound advanced for the first time in three years against the dollar and extended its longest run of annual gains against the euro since the 17-nation currency’s introduction in 1999.
“I don’t buy into the euro-positive story and ultimately sterling will be better placed against the euro,” said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. (BK) in London. “You can’t look at any euro-zone country and conclude that 2013 is going to be a positive year.”
The pound appreciated 0.3 percent to 81.52 pence per euro as of 1:41 p.m. London time yesterday, after climbing 0.5 percent on Dec. 28, the biggest increase since Dec. 6. It has gained 2.2 percent against the common currency in 2012. Sterling was little changed at $1.6176, having risen 4.3 percent in 2012.
The pound strengthened 1.6 percent last year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 0.9 percent and the dollar fell 2.8 percent.
Gilts held their biggest weekly gain in a month yesterday as U.S. lawmakers debated ways to prevent automatic spending cuts and tax increases that risked triggering a recession. The pound strengthened for a second day against the euro after data showed U.K. executives’ confidence for 2013 improved last month, indicating the risk of a triple-dip recession may be receding.
A rising pound shows the challenges new Bank of England Governor Mark Carney, who takes over from Mervyn King in July, will face as he tries to boost an economy weighed down by recession in the euro region. The central bank increased bond purchases to 375 billion pounds from 275 billion pounds last year, a move that usually debases a currency.
Italian elections in February and Spain’s deliberations over whether to seek a bailout will provide investors enough incentive to maintain the pound’s haven status even after the European Central Bank took steps to reduce the threat of a euro breakup, Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said last month.
Bank of England policy makers decided to pause their program of quantitative easing in November.
Gilts returned 2.8 percent in the year through Dec. 28, set for a third year of gains, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.5 percent and Treasuries earned 2.4 percent.
The 10-year gilt yield was little changed at 1.82 percent yesterday, after dropping six basis points, or 0.06 percentage points, last week, the biggest decline since the period ended Nov. 30. The 1.75 percent bond due in September 2022 traded at 99.41. The 10-year rate fell to 1.407 percent on July 23, the lowest since Bloomberg started tracking the data in 1989.
The gilt market was scheduled to close at 12:15 p.m. in London yesterday and will resume trading tomorrow.
That yields have remained “near those record lows reflects both that domestic monetary policy has been effective in capping yields and that the euro crisis has been supportive too,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “Heading into 2013 it is expected that low and stable yields will continue to be an important part of the slow recovery. If there is any threat to this status quo it wouldn’t be too surprising to see expectations of more QE grow.”
The pound will end 2013 at 79 pence per euro and at $1.60, according to the median forecasts of analysts in Bloomberg News surveys. The 10-year gilt yield will rise to 2.38 percent, according to a separate survey.
“Sterling is one of the more difficult currencies to try and pin down,” Bank of New York Mellon’s Mellor said. “Our working presumption is that it’s going to remain trapped somewhere between the euro and the dollar.”