The pound strengthened, extending a second weekly advance against the dollar, after Bank of England policy maker Martin Weale said the U.K. economy may recover faster than officials predict.
Sterling rose to a two-week high versus the greenback as investors awaited the publication of the Bank of England’s minutes of its November meeting next week after signaling interest rates may increase sooner than it previously forecast. The U.K. currency climbed to a four-year high against the yen for a second day after Governor Mark Carney said two days ago that Britain has “one of the strongest recoveries in the advanced world.” U.K. government bonds were little changed.
“We have seen such a strong move in the pound this week,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “The strength is justified by the improvement in the economic performance and I think over the medium term, it can continue.”
The pound climbed 0.3 percent to $1.6106 at 4:29 p.m. London time after reaching $1.6135, the highest level since Oct. 29. It has increased 0.6 percent this week. Sterling climbed 0.1 percent to 83.69 pence per euro. The U.K. currency advanced 0.5 percent to 161.49 yen after reaching 161.65, the strongest since August 2009.
“To the extent that there is a return to normality, it would not be surprising if the economy grew faster than we have forecast,” Weale said in London. Headwinds to the economy have eased and problems in the euro area “have seemed more manageable,” while confidence among Britons has improved, he said.
The central bank said in its quarterly Inflation Report released on Nov. 13 the jobless rate is more likely than not to fall to the 7 percent threshold that will lead it to consider raising borrowing costs in the third quarter of 2015. Policy makers previously predicted that would only happen in the second quarter of 2016. The unemployment rate fell to 7.6 percent in the third quarter, the lowest since 2009.
“The U.K. quarterly Inflation Report essentially confirmed that the Bank of England now expects unemployment to fall faster as the economic recovery continues,” Neil Staines, London-based head of trading at ECU Group Plc, a currency manager that oversees almost $1 billion, wrote in a note to clients. “In an environment of low inflation, rising growth and rising employment, U.K. assets should remain attractive.”
The Bank of England will publish the minutes of its Nov. 7 policy meeting on Nov. 20. At that gathering, the central bank kept its key rate at a record-low 0.5 percent and maintained its asset-purchase target at 375 billion pounds.
The minutes are “likely to highlight the favorable economic backdrop,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “They might shed a bit more light on any differences of views between committee members.”
The pound strengthened 5.5 percent in the past six months, the best performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.3 percent, while the dollar dropped 0.8 percent.
Bank of England policy maker David Miles said interest rates should only be increased when other tools have been exhausted.
Speaking at a conference hosted by the Federal Reserve Bank of Dallas yesterday, Miles said the problem with using monetary policy to stabilize the housing market would be “acute” if the property market was overheating while the wider economy wasn’t and inflation was low.
“Variations in interest rates that central banks can control are rather a blunt instrument,” he said. “Indeed the impact on assets other than houses, and the effects on borrowing and spending unrelated to housing, may well be far greater than the impact on housing.”
The benchmark 10-year gilt yield was at 2.75 percent, having declined two basis points, or 0.02 percentage point, this week. The price of the 2.25 percent bond maturing in September 2023 was 95.755.
The Debt Management Office plans to sell 3.75 billion pounds of 10-year gilts on Nov. 19 and 4.75 billion pounds of securities due in 2019 on Nov. 21.
Gilts lost 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.1 percent and U.S. Treasuries declined 2.3 percent.
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