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Pound Climbs to Five-Week High Versus Euro on Cyprus; Gilts Gain

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March 18 (Bloomberg) -- The pound strengthened to a five-week high against the euro after the imposition of a levy on bank deposits in Cyprus threatened to throw Europe back into crisis, fueling demand for U.K. assets as a haven.

Sterling rose versus all but three of its 16 major counterparts as a vote on the tax championed by Cypriot President Nicos Anastasiades to help secure rescue loans for the indebted Mediterranean nation was delayed for a second day. U.K. government bonds gained, pushing down 10-year yields to the lowest this year. The pound has still weakened 5.5 percent versus the euro this year as British policy makers consider further stimulus to boost the economy.

“This is basically a euro story and something that explains the move in sterling,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “Euro-sterling is a choice between a rock and a hard place.”

The pound advanced 0.8 percent to 85.83 pence against the euro at 4:30 p.m. London time, after jumping by as much as 1.4 percent to 85.31 pence, the strongest level since Feb. 11. It was little changed at $1.5121.

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm since the European Central Bank’s pledge in September to backstop troubled nations’ debt. Cyprus’s banks may not reopen tomorrow after a holiday today, state-run broadcaster CYBC reported.

House Prices

The U.K. currency also gained after Rightmove Plc said house prices rose for a third consecutive month in March.

The pound has advanced 1.3 percent in the past week, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro fell 0.8 percent and the dollar was little changed.

Sterling has weakened 7 percent against the greenback this year amid speculation the Bank of England will boost its asset-purchase program to revive the economy and counter the impact of Chancellor of the Exchequer George Osborne’s austerity program. The central bank last increased the target in July, boosting it by 50 billion pounds to 375 billion pounds.

“There is no easy answer, there is no miracle cure,” Osborne told BBC1 Television in London yesterday, defending spending cuts before his March 20 budget. “We have to go on confronting the very difficult economic problems.”

Futures Bets

The yield on the 10-year gilt fell five basis points, or 0.05 percentage point, to 1.89 percent, after being as low as 1.86 percent, the least since Dec. 31. The 1.75 percent security maturing September 2022 gained 0.4, or 4 pounds per 1,000-pound face amount, to 98.79.

Futures traders increased bets the pound will weaken against the dollar, figures from the Commodity Futures Trading Commission show. The difference in the number of wagers on a decline compared with those on a gain, so-called net shorts, was 49,800 on March 12, the most since October 2011.

Morgan Stanley lowered its year-end forecast for the pound to $1.43 from $1.57, citing economic weakness that “has developed far more quickly than we had initially envisaged,” analysts led by Hans Redeker in London wrote in a note to clients.

German bonds and U.S. Treasuries also rose as investors sought safer assets. Italian and Spanish bonds slid and the euro weakened against all of its 16 major peers, slumping 1 percent versus the South African rand. Germany’s two-year note yields fell below zero for the first time in more than two months.

U.K. government bonds earned 0.2 percent this month through March 15, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.

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