Pound Jumps Versus Dollar on U.S. Rate-Cut Bets; Gilts Advance

By Andrew MacAskill

Sept. 15 (Bloomberg) -- Britain's pound jumped against the dollar on mounting speculation the U.S. Federal Reserve will cut interest rates to ease economic disruption after Lehman Brothers Holdings Inc. filed for bankruptcy.

Futures trading on the Chicago Board of Trade showed a 12 percent chance the Fed will lower its 2 percent main rate at tomorrow's meeting, compared with no chance a week ago. U.K. government bonds climbed after the country's main business lobby said the Bank of England should slash its own key rate by half a percentage point to rescue the economy from a recession.

``Lehman is a massive market player and the fact that it's going into bankruptcy is putting downward pressure on the already distressed U.S. financial system,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``This is leading to a massive dollar sell off, which is clearly benefiting the pound.''

The British currency advanced to $1.8005 as of 8:06 a.m. in London, rising for a third day, from $1.7942 at the end of last week. Against the euro, the pound snapped a seven-day gain, slipping to 79.40 pence, from 79.31 pence.

Lehman today filed for bankruptcy after potential buyers including Barclays Plc abandoned talks and the U.S. government declined to fund a takeover of the crippled firm. The Fed widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather the financial turmoil.

Interest Rates

The Fed also yesterday boosted its program for lending Treasuries to bond dealers by $25 billion, bringing it to $200 billion. At the same time, a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity.

The U.K. central bank, which hasn't cut its key rate by more than a quarter point since the aftermath of the September 2001 terrorist attacks, should reduce its benchmark to 4.5 percent this year, from the current 5 percent, and to 4 percent in early 2009, the Confederation of British Industry said.

The Bank of England has kept its main rate at 5 percent since April on concern that the fastest inflation in at least a decade will become embedded in the economy. The European Commission says the U.K. has already entered its first recession since 1991 after growth ground to a halt in the second quarter, ending the longest stretch of uninterrupted expansion in a century.

U.K. government debt jumped, tracking Treasuries and European bonds higher.

The 10-year gilt yield slid 17 basis points to 4.43 percent. The 5 percent security due March 2018 climbed 1.33, or 13.3 pounds per 1,000-pound ($1,801) face amount, to 104.37.

The yield on the two-year note sank 25 basis points to 4.28 percent. Bond yields move inversely to prices.

U.S. two-year notes rose by the most since January, sending the yield below 2 percent for the first time since April. The yield on the 10-year German bund, Europe's benchmark government security, fell 16 basis points to 4.03 percent, the biggest one- day decline in three months.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net