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U.K. Pound Posts Weekly Gain Against Euro on Signs of Recovery

June 5 (Bloomberg) -- The pound rose for a second week against the euro as reports signalled the country’s economic recovery is gathering pace while the 16 economies that share the single currency falter amid the sovereign debt crisis.

Sterling also posted its first weekly gain in more than a month against the dollar after Prudential Plc abandoned its $35.5 billion takeover of American International Group Inc.’s main Asian unit, damping concern that the transaction would lead to capital leaving the U.K. The average cost of a home rose 6.9 percent in the three months through May from a year earlier, up from 6.6 percent in April, Lloyds Banking Group Plc’s Halifax unit said yesterday.

“We’ve had some good data and that has left sterling with a positive sentiment,” said Niels Christensen, a foreign-exchange strategist at Nordea Bank AB in Copenhagen. “With Prudential not taking over AIG, people started expecting them to sell back dollars” that they might have bought to fund the purchase, he said.

The pound rose 0.4 percent to 82.88 pence per euro as of 5 p.m. yesterday, leaving it 2.4 percent stronger in the week. Against the dollar, it lost 0.3 percent yesterday to $1.4564, paring its weekly gain to 0.8 percent.

Britain’s currency has climbed 7 percent against the euro this year as reports showed the U.K.’s recovery from the financial crisis is gaining momentum. Nationwide Building Society said June 3 the average cost of a home increased in May to the highest level since July 2008. Manufacturing stayed at the strongest level in more than 15 years last month, Markit Economics and the Chartered Institute of Purchasing and Supply said on June 1.

Bonds Advance

Two-year government notes rose, leaving the yield at 0.85 percent yesterday, down from 0.88 percent a week earlier. The 10-year gilt yield ended the week at 3.53 percent, from 3.58 percent on May 28.

Gilts may extend gains next week on speculation the Bank of England will keep interest rates at a record low as it seeks to safeguard the recovery. The central bank has also bought 200 billion pounds of gilts to further depress borrowing costs. The next policy decision is scheduled for June 10.

The level of spare capacity created by the recession will counter inflation pressures in the U.K., Central bank Deputy Governor Charles Bean said

“While the exact margin of spare capacity in the economy must be open to debate, at this early stage of the recovery it is more likely than not that this will bear down on inflation for some time,” Bean wrote in an article in The Daily Telegraph newspaper yesterday.

Gilts returned 4.3 percent this year, compared with a 6.4 percent increase for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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