Pound Erases This Year’s 8.9% Drop as U.K. Manufacturing Expands

The pound advanced for a third day versus the dollar, erasing this year’s decline, as an industry report showing U.K. manufacturing expanded in September added to evidence the recovery is gaining momentum.

Sterling climbed to the highest level in nine months versus the U.S. currency after a partial shutdown of America’s federal government undermined demand for the dollar. The pound appreciated to the strongest since January versus the euro before reports this week that economists said will show Britain’s construction and services both expanded last month. U.K. government bonds were little changed.

“Manufacturing activity continues to accelerate but at a slower pace, which is good,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “There’s an underlying bid to sterling that’s coming from the negative impact on the dollar from the U.S. situation. There was a period when we started 2013, when people assumed that things were looking pretty bad for the U.K., but since July the data’s turned around and things are looking better.”

The pound advanced 0.2 percent to $1.6215 at 4:42 p.m. London time after rising to $1.6260, the highest level since Jan. 2. The U.K. currency ended last year at $1.6255 and then fell as much as 8.9 percent to its 2012-low of $1.4814 on July 9. Sterling appreciated 0.1 percent today to 83.52 pence per euro after climbing to 83.33 pence, the strongest since Jan. 17.

Manufacturing Expands

A manufacturing index based on a survey of purchasing managers fell to 56.7 last month from a revised 57.1 in August, according to Markit Economics and the Chartered Institute of Purchasing and Supply. A reading above 50 indicates growth. A gauge of construction output will climb to 59.5 from 59.1, economists said before a report tomorrow, while an index of services the following day will stay at a six-year high of 60.5, a separate survey showed.

“The pound has continued to outperform,” Morgan Stanley analysts led by head of global currency strategy Hans Redeker in London, wrote in a note to clients. “We maintain a near-term bullish stance.”

After breaching $1.62 yesterday, the U.K. currency may now extend gains toward January’s high, Redeker wrote. The pound climbed to $1.6381 on Jan. 2, the strongest since August 2011.

The pound fell versus 28 of its 31 major counterparts in the first quarter of 2012, sliding 6.5 percent against the dollar, amid speculation a stuttering recovery would spur the Bank of England to keep expanding bond purchases that tend to weaken a currency.

Growth signs have since convinced the central bank to leave its stimulus target at 375 billion pounds, with Governor Mark Carney saying last week there was no case for more quantitative easing unless the economy falters.

Best Performer

The pound rose 6.7 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 5.5 percent, while the dollar weakened 0.5 percent.

The U.S. currency weakened against most major counterparts today as wrangling between Senate Democrats and House Republicans threatened to curb economic growth.

U.K. Prime Minister David Cameron underscored the dangers stemming from the partial shutdown.

“It is a risk to the world economy if the U.S. can’t properly sort out its spending plans,” Cameron told BBC Radio 4’s “Today” program in Manchester, where his Conservative Party is holding its annual conference.

The yield on the benchmark 10-year gilt fell one basis point, or 0.01 percentage point, to 2.71 percent. The 2.25 percent bond due in September 2023 rose 0.07, or 70 pence per 1,000-pound face amount, to 95.995.

The Debt Management Office said today it will sell 1.75 billion pounds of index-linked securities maturing in November 2019 on Oct. 8.

Gilts handed investors a loss of 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds dropped 1.4 percent, and U.S. Treasuries declined 2.4 percent.

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