Pound Gains Versus Dollar on Demand for Higher-Yielding Assets

The pound had its first weekly gain versus the dollar in a month after the European Central Bank said it would delay stimulus withdrawal to calm market turmoil as investor appetite grew for higher yielding assets.

Sterling was little changed versus the euro this week after ECB President Jean-Claude Trichet said the bank will not withdraw emergency liquidity measures designed to support euro-area economies. The U.S. added fewer jobs than forecast and the unemployment rate unexpectedly increased. U.K. stocks rose.

“If you look back to a week ago the prospect of things worsening in Europe, the potential risk exposure of U.K. banks to Ireland and Spain also, and the threat of contagion in Europe was a negative,” said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. “We’ve seen an easing of those tensions as the week goes on. Those factors have certainly been an important element of sterling recovery.”

The pound rose to $1.5749 as of 5:51 p.m. in London yesterday, a weekly gain of 1 percent. Sterling strengthened 0.5 percent against the euro for the week.

Data yesterday showed U.S. payrolls increased 39,000 in November, less than the most pessimistic projection of economists surveyed by Bloomberg News. The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated, according to Labor Department figures.

Irish Bailout

European governments handed Ireland an 85 billion-euro ($113 billion) aid package on Nov. 28, which failed to tighten higher yielding euro-area debt spreads. Trichet announced on Dec. 2 the ECB will keep offering banks as much funds as they want at a fixed interest rate for seven days, one month and three months through the first quarter. The move marked a policy shift from November, when he indicated the bank would tighten access to cash. The central bank also bought Portuguese and Irish government bonds according to traders.

U.K. government bonds fell as investors moved away from the security of gilts and German bunds. Portuguese and Irish bonds surged the most since May while the benchmark Stoxx Europe 600 gained 1.7 percent and the FTSE 100 Index rose by 1.4 percent in the week.

The 10-year gilt yield gained seven basis points over the week to reach 3.42 percent. The two-year note yield was little changed at 1.03 percent.

Gilts have returned 6.5 percent this year, compared with a 6.8 percent gain for German bonds and 7 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Sterling has weakened 4.8 percent against a basket of its developed-country peers this year, according to Bloomberg Correlation-Weighted Currency Indexes, making it the third-worst-performing currency after the euro and Norwegian krone. It has appreciated 0.2 percent in the past month.

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