Pound Rises Versus Euro, Dollar as Stocks Climb for Second Day

By Kim-Mai Cutler

Oct. 14 (Bloomberg) -- Britain's pound rose against the euro and dollar as U.K. stocks advanced for a second day after the government bailed out three of the country's major banks.

The currency climbed to the highest level versus the dollar and euro in almost a week as the U.K. equity benchmark, the FTSE 100 Index, gained 14 percent in two days after the government invested 37 billion pounds ($64 billion) to rescue Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc. Ten-year gilts fell for a sixth day as inflation quickened to the fastest pace in at least 11 years in September.

``Sterling is going to continue to pick up support in the near term,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, France's biggest bank. ``Now we've seen a global approach to the financial crisis, that's going to provide support to risk appetite. Currencies which have suffered are likely to see a bit of a bounce back.''

The pound advanced to 78.11 pence per euro by 11:22 p.m. in London, rising for a third day, from 78.31 yesterday. Against the dollar, the U.K. currency climbed to $1.7590 from $1.7341.

The U.S. government is planning to invest about $125 billion in nine of the biggest banks as part of a $700 billion rescue approved by Congress. It follows similar moves by European leaders to unfreeze credit markets by helping beleaguered banks.

Countries in the euro region, including Spain, the Netherlands and Austria, also said yesterday they would take stakes in lenders as part of the bailout plan.

Inflation Quickens

Inflation in Europe's second-largest economy quickened to the fastest pace in at least 11 years in September, squeezing consumers with higher living costs as the financial-market crisis curbed access to credit. Prices rose an annual 5.2 percent in the month, exceeding the Bank of England's 2 percent target for a year, data from the Office for National Statistics showed today.

Further gains for the pound may be limited after an industry report showed home sales fell in September to the lowest level in at least three decades, led by London, as the financial crisis eroded prices across the nation.

Estate agents and surveyors sold an average of 11.5 homes last month, the lowest level recorded since the series began in 1978, the Royal Institution of Chartered Surveyors said today. The number of residential property agents and surveyors saying prices fell exceeded those reporting gains by 84, compared with 82 in August.

Gilts Fall

U.K. government bonds dropped after the country's debt-sales office said it will sell securities to raise funds to help British banks.

The yield on the two-year note rose 11 basis points to 3.81 percent, with the price of the 4.75 percent security due June 2010 sliding 0.18, or 1.8 pounds per 1,000-pound ($1,750) face amount, to 101.48. The yield on the 10-year note gained 2 basis points to 4.67 percent, near the highest level since Sept. 23. Bond yields move inversely to prices.

The Debt Management Office said it will provide details of the debt-sales program today. Gilt market makers said they preferred financing with bonds rather than short-term Treasury bills, according to a press release from the office today.

Members supported reopening five- to 10-year gilt issuance and one-year bills to help fund the bank bailouts.

``The expected glut in gilt supply has already caused a significant almost parallel sell-off of the gilt curve,'' Owen Roberts, a London-based fixed-income analyst at Morgan Stanley in wrote in a research note. ``The market seems to be unsure about where the additional supply will come.''

The gap between yields on the two- and 10-year notes narrowed 7 basis points today to 0.87 percentage point.

Traders added to bets policy makers will lower borrowing costs again after cutting the main rate by half a percentage point on Oct. 8, in concert with other central banks. The implied yield on the December short-sterling futures contract was at 4.96 percent today, from 5.27 percent a week ago.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net