The pound rose the most against the dollar since December 2010 on optimism European policy makers will step up efforts to contain the debt crisis, improving the outlook for the U.K. economy.
Sterling advanced against all except three of its 16 major counterparts after European Central Bank President Mario Draghi said officials will do whatever is needed to preserve the single currency, suggesting officials may intervene in bond markets to contain rising borrowing costs. U.K. gilts dropped for the first time in five days as demand for safer assets waned.
“Draghi’s comments have given a lift to risk in general and so the pound has rallied significantly against the dollar,” said Peter Kinsella, a foreign-exchange strategist at Commerzbank AG in London.
The pound rose 1.2 percent to $1.5690 at 4:21 p.m. London time after climbing as much as 1.5 percent, the biggest intraday gain since Dec. 31, 2010. The U.K. currency appreciated 0.1 percent to 78.38 per euro. It advanced to 77.55 pence on July 23, the strongest level since October 2008.
Draghi’s comments came amid pressure from Spanish policy makers after the nation’s two-, five-, 10- and 30-year yields all surged above 7 percent yesterday, the level that spurred Greece, Ireland and Portugal to seek bailouts.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said in a speech at the Global Investment Conference today in London. “Believe me, it will be enough.”
The pound has appreciated 4.6 percent in the past year, the third best performer behind the yen and the dollar of the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has fallen 7.7 percent.
The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 1.49 percent. The 4 percent bond maturing in March 2022 fell 0.285, or 2.85 pounds per 1,000 pound face amount, to 122.435.
Two-year yield dropped to a record before Draghi’s comments as concern the regional debt crisis will worsen underpinned demand for the safest securities.
The two-year yield fell to an all-time low of 0.046 percent before rising three basis points 0.092 percent.
Bank of England policy makers meet next week after boosting asset purchases, or so-called quantitative easing, by 50 billion pounds this month.
The U.K. economy shrank the most since 2009 in the second quarter, a government report showed yesterday. Gross domestic product contracted 0.7 percent from the first quarter, when it dropped 0.3 percent, the Office for National Statistics said.
“From a quantitative-easing perspective, the bullish scenario for gilts is still very much intact,” said Sam Hill, a gilt strategist at Royal Bank of Canada in London.
Hill said Royal Bank of Canada is predicting the central bank will increase asset purchases by another 50 billion pounds when it meets in November.
U.K. government bonds have returned 17 percent in the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Bunds gained 12 percent, and Treasuries rose 9.9 percent.