Pound Approaches One-Year High on Optimism Economy Is Improving

The pound rose toward a one-year high against the dollar after an industry report showed U.K mortgage approvals increased last month, adding to signs the nation’s economy is improving.

Sterling also gained versus the yen as draft guidelines for Europe’s permanent rescue fund, the European Stability Mechanism, showed it will invest in a broad range of assets, reducing the chance that contagion will hurt the U.K. economy. A U.K. report last week showed the budget deficit was smaller than economists forecast. Gilts were little changed.

The pound rose as “sentiment improved in terms of the ESM being able to invest in a broader range of assets,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “The U.K. housing data was also marginally better.”

The U.K. currency appreciated 0.2 percent to $1.6241 at 4:28 p.m. London time after climbing to $1.6309 on Sept. 21, the highest since Aug. 31, 2011. Sterling was little changed at 79.76 pence per euro after rising to 79.37 pence, the strongest since Sept. 7.

U.K. mortgage approvals climbed to 30,533 last month, the most since April, from 28,750 in July, the British Bankers Association said. The budget deficit excluding government support for banks was 14.4 billion pounds last month, the Office for National Statistics said Sept. 21. The median of forecasts in a Bloomberg survey was for a shortfall of 15 billion pounds.

Lending Plan

The Bank of England said today the nation’s lenders may be able to borrow an initial 61 billion pounds under its plan to boost credit to companies and households. The so-called Funding for Lending Scheme is the latest in a series of measures to help the economy fend off contagion from the European debt crisis.

The ESM, set to go into operation next month, will keep at least 15 percent of its maximum lending volume -- or 75 billion euros ($97.2 billion) out of an ultimate 500 billion euros -- in “assets of the highest creditworthiness,” according to the guidelines obtained by Bloomberg News.

The pound has strengthened 1.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro slid 3.1 percent and the dollar weakened 3 percent.

The 10-year gilt yield was at 1.82 percent after dropping to 1.77 percent, the lowest level since Sept. 12. The 1.75 percent bond due in September 2022 traded at a price of 99.35.

Gilts returned 2.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.6 percent and U.S. Treasuries rose 1.9 percent.

The U.K. sold 4 billion pounds of inflation-linked bonds maturing in March 2052 at an equivalent real yield of 0.357 percent, the Debt Management Office said in a statement.

The U.K. 30-year break-even rate, a gauge of market inflation expectations over the next three decades derived from the yield difference between regular and index-linked bonds, dropped as much as eight basis points to 2.80 percent today, the least since July 27.