The pound strengthened to a nine-month high against the euro as concern the region’s debt crisis will worsen boosted demand for the relative safety of the U.K. currency.
Gilts pared a decline as German Chancellor Angela Merkel rejected raising the upper limit of funding for the European Stability Mechanism, the permanent bailout fund slated to start next year. Fitch Ratings yesterday joined Moody’s Investors Service and Standard & Poor’s in warning it may cut the credit ratings of euro-area nations. Sterling also advanced as a report showed U.K. house prices climbed in November, easing concern the economy may slip into a recession.
“Sterling is being caught up in the euro sell-off,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. “There’s an element of safe-haven demand with the U.K. distancing itself from the issues in the euro zone.”
The pound climbed 0.4 percent to 84.28 pence per euro at 4:58 p.m. London time, after appreciating to 84.17 pence, its strongest level since Feb. 22. It fell 0.4 percent to $1.5529 after climbing as much as 0.3 percent.
Merkel told coalition lawmakers that the 500 billion-euro cap ($654.5 billion) on the permanent bailout fund will stay in place, two officials with knowledge of the discussion said. During a meeting of her Christian Democratic caucus in Berlin today, the chancellor confirmed the limit as agreed by European Union leaders last week, the officials said on condition of anonymity because the talks are behind closed doors.
A gauge of housing compiled by the Royal Institution of Chartered Surveyors rose to minus 17 percentage points from minus 24 points in October, the group said by e-mail today.
“Anything marginally firmer in terms of data right now is being taken as good given the general theme,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “The U.K. is being perceived as a small-time safe haven.”
The 10-year gilt yield was two basis points higher at 2.13 percent, after rising as much as seven basis points. The 3.75 percent bond due September 2021 fell 0.23, or 2.3 pounds per 1,000-pound face amount, to 114.205.
The Bank of England is prepared to add further stimulus if needed as economic growth stalls and the euro debt crisis threatens the outlook, Chief Economist Spencer Dale said.
“Although the precise reasons why the economy appears to have slowed are uncertain, and we can’t rule out some intensification of domestic headwinds, the most likely explanation would seem to be the growing fallout from the euro area as it has lurched from one mini-crisis to another,” Dale said today in a speech in London.
Gilts have returned 16 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 8.5 percent, and U.S. Treasuries climbed 9.3 percent.
“Being outside of the euro and having its own currency, the U.K. is benefiting from European problems,” said Elisabeth Afseth, a strategist at Evolution Securities Ltd. in London. “In a muddle-along scenario, it is better to be out than in from a bond-market perspective.”