Pound Snaps Seven-Day Decline Against Dollar, Surges Versus Yen

By Agnes Lovasz

Oct. 28 (Bloomberg) -- The pound snapped a seven-day slide against the dollar and posted its biggest intraday gain versus the yen in at least 25 years as rising stock markets bolstered demand for the British currency.

The pound also rose versus the euro and government bonds declined. The FTSE 100 Index, a U.K. equity benchmark, jumped as much as 4.7 percent and the cost of protecting European company bonds from default fell, credit-default swaps showed. The pound's relative strength index, a chart used to indicate price direction, also signaled it was poised to rebound.

``There's been a really strong correlation between currencies and equities lately,'' said John Hydeskov, a senior analyst in Copenhagen at Danske Bank A/S, Denmark's biggest bank. ``The pound has been hit hard by this continued deleveraging. The gains in equities today are quite strong, so risk sentiment keeps things in balance.''


The pound was at $1.5743 as of 12:13 p.m. in London, from $1.5552 yesterday, rebounding from near a five-year low. The U.K. currency slid 10 percent versus the dollar during the run of declines. Against the euro, the pound strengthened to 79.88, from 80.33. It surged to 150.10 yen, from 144.29 yen, the largest increase since at least January 1983.

The currency's 14-day relative-strength index versus the dollar, a technical indicator some traders use to forecast price direction, was at 21.5 today, below the 30 threshold that typically signals a rebound.

Gilts Fall

Any gain in the pound may be limited on signs Britain's economy is sliding into its first recession since 1992.

The U.K. currency has declined 12 percent versus its U.S. counterpart this month and 21 percent since June as tumbling house prices and bank rescues sparked concern economic growth was faltering.

The pound traded near the weakest in five years against the dollar yesterday and close to its all-time low versus the euro after Hometrack Ltd. said house prices dropped this month by the most since at least 2001.

The British currency had its biggest intraday decline in at least 37 years on Oct. 24 when a government report showed the economy contracted more than twice as much as economists predicted, probably marking the start of a recession. In the second quarter, there was no growth.

Bank of England Deputy Governor John Gieve said in a speech today that financial markets remain under ``acute'' stress.

`Acute Strain'

``The financial system remains under acute strain,'' Gieve said in London. ``The falls in equity markets, corporate bond prices and the prices for leveraged loans is hitting both long- term institutional investors and leveraged investors, including hedge funds.''

The U.K. central bank said in its semi-annual report that slower economic growth has increased risks to financial stability.

Repossessions of British homes jumped by 71 percent in the second quarter, the U.K. financial regulator said, as rising borrowing costs made it harder for property owners to pay off their mortgages.

The yield on the 10-year gilt gained 5 basis points to 4.43 percent. The 5 percent security due March 2018 fell 0.42, or 4.2 pounds per 1,000-pound ($1,572) face amount, to 104.31. The yield on the two-year note rose 5 basis points to 3.17 percent. Bond yields move inversely to prices.

The U.K. government sold 1 billion pounds of 1.25 percent inflation-linked bonds at an auction today. The notes mature in November 2032. Demand for the securities exceeded the amount allocated by 2.5 times.

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