British Pound Climbs Against Dollar, Euro as Stock Markets Gain

By Andrew MacAskill

Oct. 20 (Bloomberg) -- The pound advanced against the dollar and euro on speculation rising stock markets will increase demand for the British currency.

The FTSE 100 Index, a U.K. equity benchmark, will rise 35 to 4,098, according to Oliver Stevens, head of dealing in Melbourne at IG Markets, a spread-betting firm. Gains by the pound may be limited after a report from Rightmove Plc said British house prices posted the biggest annual decline in at least six years this month as the economy stared ``into the abyss.''

The U.K. currency rose to $1.7432 as of 7:13 a.m. in London, from $1.7281 on Oct. 17. Against the euro, the pound traded at 77.40 pence, from 77.61, a seventh straight day of gains.

Gains by the FTSE 100 would build on a 3.3 percent increase last week, its first weekly advance in five. Stocks rose in Asia today and U.S. index futures were higher, with futures on the Standard & Poor's 500 Index climbing 2.2 percent.

The average asking price for a home fell 4.9 percent from a year earlier, the most since records began in 2002, to 229,691 pounds ($398,000), Britain's most-used property Web site said today. In London, prices dropped 2 percent from a year ago.

``Certainly from an economic point of view, we've stared into the abyss,'' Miles Shipside, commercial director at Rightmove in London, said in a Bloomberg Television interview.

Britain is in a recession and will contract for the next three quarters, according to a report published today by Ernst & Young's ITEM Club, which uses the same forecasting model as the U.K. Treasury.

Spread Widens

The difference in yield between two-and 10-year U.K. government bonds widened last week to the most since October 1996, indicating investors are increasing bets on a deteriorating economic outlook and more interest-rate reductions.

A government report this week will probably show gross domestic product contracted 0.2 percent in the third quarter, the median forecast of 35 economists in a Bloomberg News survey shows. The U.K. economy stalled in the second quarter, ending the longest stretch of uninterrupted growth in more than a century.

The Bank of England reduced the benchmark interest rate by half a percentage point on Oct. 8 in a move coordinated with central banks including the European Central Bank and Federal Reserve. The key rate was lowered to 4.5 percent.

The yield on the two-year gilt rose 10 basis points last week to 3.63 percent. The 4.75 percent security due June 2010 dropped 0.19, or 1.9 pounds per 1,000-pound ($1,743) face amount, to 101.76. The yield on the 10-year security climbed 20 basis points to 4.67 percent. Bond yields move inversely to prices.

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