Pound Strengthens Against Dollar as Economic Recovery Broadens

The pound advanced against the dollar as data showed a surge in business investment helped the British economy grow for a fourth straight quarter, boosting the allure of the U.K. currency.

Sterling rose versus the euro this week as Bank of England policy makers expressed little concern that the strength of the currency would harm the economy. Officials also said any increases in interest rates from a record low will be gradual and limited. Central bank Chief Economist Spencer Dale told Bloomberg there will probably be a “healthy” split among voting members on when to raise rates. U.K. government bonds advanced for a second week.

“We are seeing a gradual spillover of the recovery from consumption into the investment sector,” said Vasileios Gkionakis, head of global foreign-exchange strategy at UniCredit SpA in London. “This means that the recovery is becoming more sustainable. The pound will benefit from it because you will be talking about a strong and well-balanced economy and the Bank of England is going to hike rates earlier than consensus expects.”

The pound rose 0.8 percent in the week to $1.6745 at 4:56 p.m. London time yesterday after reaching $1.6769, the highest since Feb. 17. The U.K. currency appreciated 0.3 percent to 82.44 pence per euro. It climbing to 81.91 pence yesterday, the strongest level since Feb. 18.

The pound will advance to $1.72 and 81 pence per euro by the end of the year, Gkionakis forecasts. Sterling will reach $1.75 and 83 pence per euro by the end of 2015, he said.

U.K. Growth

Britain’s gross domestic product increased 0.7 percent in the fourth quarter from the previous three months, the same as previously estimated, the Office for National Statistics said on Feb 26. From a year earlier, the economy expanded 2.7 percent, the most in almost six years. There was an annual 8.5 percent increase in business investment, following four quarters of annual contraction.

Sterling has gained 12 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid optimism an improving economy will convince the central bank to raise interest rates. The dollar gained 0.2 percent and the euro advanced 6.6 percent.

“The strength of sterling is really a reflection of the fact that the rest of the world, Europe in particular, hasn’t grown much,” central bank Monetary Policy Committee member Ben Broadbent told a conference in London on Feb. 26. Colleague Ian McCafferty said the previous day that sterling’s gains were not yet a “major problem” for exporters.

Policy makers will meet on March 5-6. Analysts forecast they will keep the key interest rate at the record-low 0.5 percent, where it’s been since March 2009.

The benchmark 10-year gilt yield fell six basis points, or 0.06 percentage point, to 2.72 percent. The 2.25 percent bond maturing in September 2023 rose 0.505, or 5.05 pounds per 1,000-pound face amount, to 96.085.

U.K. gilts returned 2.5 percent this year through Feb. 27, according to Bloomberg World Bond Indexes. German bonds earned 2.6 percent and U.S. Treasuries advanced 2.1 percent.

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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