Pound Rises to One-Year High on Bets U.K. Economy Will Improve

The pound rose to the strongest level in more than a year against the dollar on speculation the U.K. economy is poised to recover from recession while the Federal Reserve expands monetary easing.

Sterling extended a seventh week of gains versus the greenback, the longest run since December 2004, after a government report showed the U.K. budget deficit was less than economists forecast in August. The Fed said last week it would buy $40 billion of mortgage bonds a month to pump money into the economy to cap U.S. borrowing costs. U.K. 10-year bonds fell for the first time in five days.

“We’ve had three quarters of negative growth and we think that’s coming to an end now,” said Steven Saywell, head of currency strategy for Europe at BNP Paribas SA in London. “The key factors we think are going to drive the U.K. economy are exports and investment.” At the same time, the Fed’s bond purchases are weakening the dollar, he said.

The pound appreciated 0.2 percent to $1.6251 at 4:48 p.m. London time after rising to $1.6309, the strongest level since August 2011. The currency has risen 0.2 percent this week. Sterling was little changed at 79.96 pence per euro.

The U.K. budget deficit excluding government support for banks was 14.4 billion pounds last month, the Office for National Statistics said in London. The median of forecasts in a Bloomberg survey was for a shortfall of 15 billion pounds.

Budget Deficit

The pound was also supported as investors favored the U.K. currency amid speculation U.S. lawmakers are failing to address the nation’s growing budget deficit. America faces a so-called fiscal cliff in January, when $1.2 trillion in automatic spending cuts over 10 years will start and the George W. Bush-era tax cuts will expire.

The British government is attempting to impose the largest budget reduction since World War II through spending cuts and tax increases.

“There is an underlying enthusiasm to buy the pound against the dollar, largely because the dollar is undergoing a market reappraisal as the threat posed by the U.S. fiscal cliff comes into sharper relief,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “For now, the market appears content to reward pound for the simple fact that the U.K. government has a plan to deal with the deficit, whereas in the U.S. we still await any such initiative.”

Monthly Gain

The pound has appreciated 0.9 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro strengthened 2.3 percent and the dollar slid 2.3 percent.

Ten-year gilts pared a weekly advance as speculation European officials are making progress in containing the debt crisis, damped demand for safer assets.

Spanish Economy Minister Luis de Guindos and European authorities are discussing structural measures to be included in a plan to be presented on Sept. 27, the Financial Times reported, citing officials involved in discussions.

“Gilts are weighed down a bit by some optimism in the euro-zone on Spain, that they’re readying a package that then might make them apply” for a bailout, said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

The 10-year gilt yield climbed four basis points, or 0.04 percentage point, to 1.84 percent. The 1.75 percent bond due in September 2022 fell 0.345, or 3.45 pounds per 1,000-pound face amount, to 99.23. The yield has still dropped 13 basis points this week.

Gilts returned 2.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.5 percent and U.S. Treasuries earned 1.7 percent.

The Debt Management Office sold a combined 3 billion pounds of 28-, 91- and 182-day bills today.

-- Editors: Nicholas Reynolds, Mark McCord

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