British Pound Climbs Against Dollar, Euro as Equities Advance

By Anchalee Worrachate

Nov. 27 (Bloomberg) -- The British pound rose against the dollar and strengthened for a third day versus the euro as rising stocks rekindled risk appetite, spurring demand for the U.K. currency.

The pound climbed against all 16 major peers monitored by Bloomberg as the FTSE 100 Index, an equity benchmark, gained 1.8 percent, its third advance this week, and the MSCI World Index of stocks climbed for a fourth day. U.K. house prices declined this month by less than economists predicted, a Nationwide Building Society report showed. U.S. markets are closed today for the Thanksgiving holiday.

``Stocks are rising and, on that basis, it's a supportive environment for sterling,'' said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. ``Moves may also be exaggerated by illiquidity in the market as we have a holiday in the U.S. My longer-term view about the pound remains bearish because of the economic fundamentals.''

The U.K. currency rose 1 percent versus the dollar to $1.5429 at 12:24 p.m. in London, from $1.5326 yesterday. Against the euro, it strengthened to 83.57 pence, from 84.04 pence.

The pound dropped 22 percent against the dollar this year and 12 percent versus the euro as slumping house prices sent Britain to the brink of a recession.

The average cost of a home fell 0.4 percent from October and dropped 13.9 percent from a year earlier, the Swindon, England- based mortgage lender said today. Economists surveyed by Bloomberg had expected drops of 1.7 percent and 15.1 percent, respectively.

Gilts Fall

Two-year government bonds fell for a fourth day as gains in stocks sapped demand for the safest assets. Bond prices stayed lower after the Debt Management Office sold 3.75 billion pounds of debt maturing in 2012. The security was sold at an average yield of 3.11 percent, drawing bids for 1.59 times the amount of securities on offer, down from 1.65 times in the previous sale.

The decline in gilts pushed the two-year yield up 14 basis points to 2.37 percent. The price of the 4.75 percent security due June 2010 fell 0.22, or 2.2 pounds per 1,000-pound ($1,543) face amount, to 103.55.

The yield on the 10-year note was little changed at 3.78 percent. Yields move inversely to bond prices.

``It boiled down to gains in stocks and the fact the short- dated gilt auction was not well-received,'' said Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London. ``I see the rise in yields as a blip as interest rates will fall further.''

Long Bonds Gain

A slump in global growth and almost $1 trillion of losses and writedowns at financial institutions fueled demand for the relative safety of government fixed income this year. The Organization for Economic Cooperation and Development said Nov. 25 the world's largest economies need to lower borrowing costs further and cut taxes.

Gilts underperformed their European counterparts this quarter, handing investors a 5.14 percent return since the end of September, compared with a gain of 5.69 percent on German bonds, according to Merrill Lynch & Co. U.K. Gilts and German Federal Governments indexes.

Long-dated bonds rose on speculation coupon payments in the first week of December will be reinvested in gilts with maturities longer than 15 years, and on bets that so-called year-end index rebalancing will boost demand for such securities.

The DMO will make 5.56 billion pounds of coupon payments for 14 bonds on Dec. 7, estimated Royal Bank of Scotland Group Plc, one of the 15 financial institutions that deal directly with the Treasury. Nine of those 14 bonds are long-dated securities.

`Chase Yields Lower'

``About 3.2 billion pounds will come from 15-plus bonds and is likely to be redeployed,'' said Jason Simpson, a fixed-income strategist in London at RBS. ``There remains a risk that market participants are forced to chase longer yields lower.''

Simpson estimated the duration of the iBoxx All Gilts index will extend by 0.28 years going into January after removal of a 5.75 percent security due December 2009. This will require investors who use it as a benchmark to buy longer-dated bonds to match the change. Duration is a measure of the sensitivity of a security's price to changes in interest rates, expressed as a number of years.

The yield on the 15-year gilt fell four basis points to 4.38 percent, while the 30-year bond yield declined 5 basis points to 4.03 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net