Pound Rises to Nine-Week High Against Euro, Gains Versus Dollar

By Anchalee Worrachate

Feb. 6 (Bloomberg) -- The pound rose to the highest level in almost nine weeks against the euro on speculation interest- rate cuts by the Bank of England will help revive the U.K. economy faster than the rest of Europe.

The British currency strengthened to less than 87 pence per euro for the first time since Dec. 9. U.K. policy makers lowered the key rate yesterday to an all-time low of 1 percent. The European Central Bank kept its benchmark rate at 2 percent.

“The contrast in policy responses is growing,” analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, wrote in a report today. “Sterling is likely to gain the benefit of some policy credibility, particularly compared to the euro. The ECB is seen as behind the curve, with its reluctance to act with even traditional policy measures” suggesting the euro will fall further.

The pound appreciated as much as 1 percent to 86.64 pence per euro, before trading at 87.33 pence as of 11:40 a.m. in London, set for a second straight weekly gain. The U.K. currency climbed 0.4 percent to $1.4663, also on course for a second five-day advance.

The Bank of England said yesterday the global economy is in the throes of a severe recession and that cuts in borrowing costs, fiscal measures and a weaker pound will boost the U.K. economy. ECB President Jean-Claude Trichet said policy makers may reduce the refinancing rate next month. The Federal Reserve’s main rate is as low as zero.

Gilt Gains

Government bonds rose, with 10-year securities heading for the first weekly gain in five as economic reports showed the service industry contracted for a ninth month, manufacturing production fell at a faster pace than forecast and consumer confidence deteriorated.

The yield on the 10-year gilt fell four basis points to 3.68 percent, two basis points lower than a week ago. The 5 percent security maturing in March 2018 rose 0.29, or 2.9 pounds per 1,000-pound ($1,465) face amount, to 110.13.

The two-year yield declined two basis points to 1.64 percent. Bond yields move inversely to prices.

The difference in yield, or spread, between the two- and the 10-year bonds narrowed to 204 basis points, from 220 basis points last week. The flattening yield curve suggested investors may pare back expectations for further rate cuts by the central bank.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; David Clarke in Edinburgh at dclarke3@bloomberg.net