Pound Rises Third Week as Fed Refrains From Tapering; Gilts Fall

Sept. 21 (Bloomberg) -- The pound strengthened for a third week against the dollar after the Federal Reserve unexpectedly refrained from slowing debt purchases that have devalued the U.S. currency.

Sterling climbed to the highest level in eight months versus the greenback as minutes of the Bank of England’s September meeting showed U.K. officials saw no need for additional stimulus as the economy improves. Britain’s government bonds fell, pushing 10-year yields toward the highest level since July 2011, as the minutes damped speculation the central bank will resume purchasing the securities.

“Sterling has clearly seen positive momentum in recent months,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “This is thanks to a good run of firm data and a feeling in the market the new Bank of England chief, Mark Carney, is not as bearish as many feared. The longer the U.S. waits to unwind quantitative easing, the more sterling should benefit from broad dollar weakness.”

The pound advanced 0.9 percent this week to $1.6022 as of 5:02 p.m. London time yesterday after climbing to $1.6163 on Sept. 18, the highest level since Jan. 11. The U.K. currency dropped 0.8 percent to 84.40 pence per euro.

Gains in the pound were tempered after a government report on Sept. 19 showed U.K. retail sales unexpectedly declined in August. The U.K. currency dropped 0.7 percent that day.

Best Performer

Sterling has risen 5.8 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.1 percent and the dollar weakened 0.9 percent.

Fed policy makers said this week they want more evidence of a recovery before paring their $85 billion-a-month quantitative-easing program. Chairman Ben. S. Bernanke said the central bank must determine its policies based on “what’s needed for the economy,” even if it surprises markets.

Bank of England minutes published on Sept. 18 showed the Monetary Policy Committee voted unanimously to keep its bond-purchase target at 375 billion pounds.

The yield on the benchmark 10-year gilt rose one basis point, or 0.01 percentage point, to 2.92 percent this week after rising to 3.05 percent on Sept. 11, the highest since July 27, 2011. The 2.25 percent bond maturing in September 2023 fell 0.06, or 60 pence per 1,000-pound face amount, to 94.235.

The U.K. is scheduled to sell inflation-linked securities due in March 2068 via banks next week. The Debt Management Office has hired Barclays Plc, Deutsche Bank AG, HSBC Holdings Plc and Morgan Stanley to manage the deal.

U.K. government bonds lost 4.3 percent this year through Sept. 19, according to Bloomberg World Bond Indexes. German securities dropped 2.3 percent and Treasuries fell 3 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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