Pound Gains Versus Dollar, Euro; U.K. to Provide Cash to Banks

By Agnes Lovasz

Oct. 8 (Bloomberg) -- The pound rose against the dollar and euro after the U.K. said it will make about 50 billion pounds ($87 billion) available to the country's banks.

The pound climbed against 15 of its 16 most-actively traded counterparts. As part of the plan, the government will buy preference shares, and the Bank of England will make at least 200 billion pounds available for banks to borrow under the so-called special liquidity plan, the Treasury said in a statement today. The government will also provide a guarantee of about 250 billion pounds to help refinance debt.

``The U.K. is looked upon to lead the way out of the crisis,'' said Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. ``The total size of the package is far larger than initially expected. There's reflex bullishness for the pound.''

The pound increased to $1.7560 as of 7:57 a.m. in London, from $1.7455 yesterday. The currency jumped versus the euro, trading at 77.23 pence, from 77.87 pence. The pound may strengthen to 76 pence today, Jones said. Against the yen, the pound fell to 175.95, from 177.13.


The steps to partially nationalize the banking industry provide ``the necessary building blocks to allow banks to return to their basic function of providing cash and investment for families and businesses,'' Chancellor of the Exchequer Alistair Darling said in a separate statement.

`Strong Lift'

``The pound is getting a strong lift on the back of the Treasury announcement,'' said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. ``The size of the package was a big positive and there is relief that something is being done.''

The National Institute for Economic and Social Research said the Bank of England should cut interest rates by a half point to 4.5 percent tomorrow as Britain entered a recession in the third quarter. That would be twice the amount predicted in a Bloomberg survey of economists.

Gross domestic product shrank by 0.2 percent in the three months through September, the first contraction for a calendar quarter since 1992, the Niesr said. Consumer confidence fell to its lowest level since at least 2004, a separate report by Nationwide Building Society showed.

Traders added to bets on a rate cut by the Bank of England tomorrow. The implied yield on the March short-sterling futures contract declined 23 basis points to 4.04 percent yesterday. It was 4.72 percent at the end of last week.

U.K. government notes fell, with the yield on the 10-year gilt rising 9 basis points to 4.33 percent. The price of the 5 percent security due March 2018 dropped 0.70, or 7 pounds per 1,000-pound ($1,760) face amount, to 105.17. Two-year yields climbed 5 basis points to 3.65 percent. Bond yields move inversely to prices.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net