Pound Rises Versus Dollar as Stocks Gain on China Spending Plan

By Lukanyo Mnyanda

Nov. 10 (Bloomberg) -- The pound advanced for a second day against the dollar as stock-market gains revived demand for higher-yielding assets.

The currency pushed its gains in the past two days to 0.8 percent after China, the world's biggest contributor to growth, unveiled a $586 billion plan to stimulate the economy. The FTSE 100 Index, the U.K.'s equity benchmark, gained with stocks around the world as leaders of the Group of 20 nations said they were prepared to act urgently to spur growth.

``The pound reflects the improvement in risk appetite,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. China's stimulus package ``has definitely helped risk sentiment and gave the pound a boost.''

Britain's currency rose 1.1 percent to $1.5811 by 11:23 a.m. in London, from $1.5643 at the end of last week. Against the euro, the currency weakened to 81.53 pence from 81.31 pence. The currency may trade at 84 pence per euro in ``the next couple of weeks,'' Hardman predicted.

The leaders of the G-20 ``stand ready to urgently take forward work and actions agreed by our leaders to restore and maintain financial stability and support global growth,'' they said in a statement yesterday after a meeting in Sao Paulo, Brazil.

The U.K. government will cut taxes for families, the elderly and small businesses and maintain ``high'' public spending by increased borrowing, the Daily Telegraph reported yesterday, without saying where it got the information. Chancellor of the Exchequer Alistair Darling will announce the plan in a pre-budget report next week, the newspaper said.

Rate Cuts

Gains by the pound may be limited as traders raised bets the Bank of England will keep cutting borrowing costs to prevent the economy from entering its first recession since the early 1990s. Policy makers cut the benchmark rate 1.5 percentage points to the lowest level since 1955 on Nov. 6. The U.K.'s 3 percent compares with 3.25 percent in the nations sharing the euro and 1 percent in the U.S.

Factory-gate prices fell at the fastest pace in at least 22 years last month, a government report showed today. They slipped 1 percent from a month earlier following a 0.2 percent drop in September, the Office for National Statistics said. Economists had predicted a 0.5 percent decline, according to a Bloomberg survey.

Investors are reducing their inflation expectations with the spread between the five-year gilt and its index-linked counterpart falling to the least since at least 1996. The so- called breakeven rate was at 0.48 percentage points, from 1.02 percentage points a week ago.

Yield Spread

The spread between two- and 10-year yields jumped 125 basis points since Sept. 30 as investors reduced their inflation expectations and increased bets on lower interest rates. The difference was 169 basis points today.

``We are likely to see more rate cuts and that's going to weigh on sterling,'' Ian Stannard, a senior currency strategist in London at BNP Paribas SA, said in a Bloomberg Television interview. ``The economic outlook has deteriorated rapidly, hence the bold steps from the BOE.''

HSBC Holdings Plc, Europe's biggest bank, set aside a more- than-estimated $4.3 billion in the third quarter for bad loans in the U.S., while Nationwide Building Society, the U.K.'s biggest customer-owned lender, said mortgage lending fell 72 percent in the first half.

Government notes dropped, with the yield on the two-year gilt rising 4 basis points to 2.52 percent. The 4.75 percent security due June 2010 fell 0.07, or 70 pence per 1,000-pound ($1,578) face amount, to 103.42. The 10-year yield advanced 3 basis points to 4.22 percent.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net